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ASOS - Growth continues

George Salmon | 17 October 2017 | A A A
ASOS - Growth continues

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ASOS plc Ordinary 3.5p

Sell: 3,083.00 | Buy: 3,086.00 | Change 55.00 (1.81%)
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ASOS delivered full year results in line with previous guidance, namely for sales to increase 'at the upper end of the 30-35% range'. While the group remains confident in its growth prospects and is ramping up investment, results do imply trading in July and August was marginally behind previous expectations. The shares dipped slightly on the news.

Our view

Online shopping is hugely popular with ASOS' 20-something target customer, so the potential of the group is clear for all to see. Revenue growth was meteoric in the early years, and has averaged over 30% since 2011. Consequently, the shares have always been highly rated, and currently trade on 59 times expected earnings.

Despite its impressive growth rates, ASOS still only has a small market share in the vast clothing markets of the UK, Europe and the US. So it's perhaps unsurprising the group is focused on reinvesting in these opportunities and doesn't pay a dividend. This seems fair to us.

Investment is being cranked up across the board. For example, capacity in warehousing and returns facilities is being boosted from Barnsley to Berlin, while the new site in the US adds valuable capacity there. With savvy social media-led marketing and customer care teams building and maintaining relationships, the group is confident its investment in logistics will lay the foundations for a c.60% increase in unit capacity and help it reach £4bn of annual sales.

85,000 items are available on the website, meaning a fashion faux pas is less of a risk than at a traditional retailer. However, the group's high rating does put the pressure on it to deliver a smooth roll-out. Investors may remember when some teething problems in early 2014 sent the shares plummeting.

All-in-all, we rather like ASOS. There's little reason to think that its growth is going to be constrained by anything other than its own ability to manage the pace of expansion. There are worse problems to have.

Full year results:

Retail sales rose 34% to £1,876.5m. Around 7 percentage points of this growth can be attributed to favourable foreign exchange movements, with the rest driven by product improvements and further price investments.

Growth was particularly strong in ASOS' international markets. Discounting currency impacts, sales rose 36% to £1.2bn, while UK retail sales of £698m were 16% up. This strong performance, combined with a favourable mix, helped operating profits rise 26% to £79.6m.

However, as a result of ASOS' investment in pricing and a 33% increase in operating costs, operating margins dipped from 4.3% to 4.1%.

ASOS' increased investment includes the opening of a new customer care site in Watford, while a higher technology spend means the group can now offer a better experience on mobile and an improved checkout. In warehousing, Eurohub 2 was opened in Berlin and has quickly grown to fulfil c.95% of all EU orders. ASOS also signed a lease on a 1m sq ft building near Atlanta, Georgia. The facility is expected to be operational by Autumn 2018.

Looking ahead, capital expenditure is set to increase from £168m this year to £200-220m in 2017/18. The group expects reported sales to grow by around 25-30% next year, moderating to 20-25% in the medium term. Operating margin should remain steady at around 4% over this time.

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