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ASOS - Progress continues, but expansion costs rising

George Salmon | 25 January 2018 | A A A
ASOS - Progress continues, but expansion costs rising

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ASOS plc Ordinary 3.5p

Sell: 2,413.00 | Buy: 2,420.00 | Change 66.00 (2.81%)
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A trading statement from ASOS shows continued strong sales momentum, but also confirms the cost of its expansion plans will be at the upper end of previous guidance.

The shares fell 2% on the news.

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Our View

Online shopping is hugely popular with ASOS' 20-something target customer, so given its position as the UK's leading online fashion retailer it clearly has bags of potential.

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 64 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.

87,000 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, and get margins marching upwards. There are worse problems to have.

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Trading details (4 months to 31 December 2017)

ASOS delivered total sales of £808.4m, up 30% (28% at constant currency) on the prior year.

Increases in all performance indicators contributed to growth. Active customers rose 2.6m to 16m, while order conversion (+0.2 percentage points), average basket value (+3%) and order frequency (+8%) also improved.

Geographically, all regions delivered growth. While ASOS describe the UK market as challenging, domestic sales rose 23% to £300.9m. This is ahead of the growth rate last year. At constant currency, the group posted increases of 28% in the US, taking sales to £102.4m, and 34% in the EU region, helping sales rise to £235.2m. Sales in the rest of the world rose 32% to £151.9m.

There's no change to existing guidance on reported sales growth, which is still expected to be 25-30% for the year as a whole. Operating margins are set to remain around 4%. However, capital expenditure looks set to come in at the upper end of the previously indicated £200-220m range.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.