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ASOS - growth not quite so dashing

George Salmon | 12 July 2018 | A A A
ASOS - growth not quite so dashing

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

ASOS plc Ordinary 3.5p

Sell: 985.50 | Buy: 987.50 | Change -21.00 (-2.09%)
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ASOS has reported weaker than expected sales growth in the 4 months to 30 June. While the group is still confident of hitting short and medium term profit guidance, it's revised this year's sales growth to the lower end of the previously guided 25-30% range.

The shares fell 7.9% on the news.

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Our View

ASOS is a go-to site for millennials looking to freshen their wardrobes.

Revenue growth has been meteoric, but ASOS still only has a small share of the vast clothing markets of the UK, Europe and the US. The potential for further growth supports its lofty rating of over 50 times expected earnings.

Clearly, ASOS will need to keep growing its profits to sustain this rating.

Its last update was slightly disappointing, but in the main ASOS has got the revenue side of things sewn up. All three of its major markets are growing rapidly.

Progress hasn't been quite so seamless as far as costs are concerned though.

Any retailer growing at 20%+ a year will need to invest, but ASOS has developed a tendency to underestimate capital spending requirements by tens of millions a year. Spending should plateau once the group has built out the next layer of infrastructure, which includes a new warehouse in Atlanta. Still, analysts don't expect margins to kick past 4% anytime soon.

A stable margin means sales momentum is likely to be the key driver of the share price in the short-term. As we saw after the last update, any sign of momentum slowing could cause the shares to wobble.

Looking further afield, we think there's plenty of reasons to be positive about the group's prospects.

Its marketing and customer care have proven adept at using social media to build and maintain relationships with customers, while brand risk is minimised by selling lines from around 850 names.

These attractive features should help ASOS reach its goal of £4bn of annual sales in the not too distant future. In the longer-term, we think its ability to expand beyond that level will only be constrained by how well it manages the pace of expansion.

While that remains the case, ASOS is likely to allocate surplus cash to growth opportunities rather than pay a dividend. Given the potential rewards available, that makes perfect sense to us.

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Trading details (changes at constant exchange rates)

Over the 4 months to 30 June, ASOS' retail sales increased 21% to £802.7m, with relatively even growth across the UK, EU and US markets.

Customer engagement metrics continue to improve. The number of active customers rose 20%, with order frequency up 8%. The value of those orders was also slightly higher.

Despite revising sales forecasts down slightly, ASOS remains happy with the market's pre-tax profit expectations of £101m this year. Guidance on capital expenditure is unchanged, with the group forecasting a £230m-£250m outlay.

Looking ahead to the medium-term, ASOS continues to expect 20-25% sales growth per annum, at a 4% operating margin.

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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.

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.

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