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ASOS - shares rise on strong results

George Salmon | 17 October 2018 | A A A
ASOS - shares rise on strong results

No recommendation

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: 2,421.00 | Buy: 2,427.00 | Change 71.00 (3.02%)
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ASOS' pre-tax profit of £102m is ahead of consensus, while capital expenditure guidance remains unchanged after having exceeded expectations in recent updates.

The shares rose 10.8% on the news.

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Our view

ASOS is a go-to site for millennials looking to refresh 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 40 times expected earnings.

A slightly weaker update earlier this year placed a few doubts over sales growth, a situation that wasn't helped by a profit warning at European rival Zalando. As it turns out, investors needn't have worried. Full year results showed all of ASOS' major markets still growing rapidly.

There was also some reassurance on costs. 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. In that context, unchanged expectations are reassuring.

Looking ahead, spending increases should moderate once the group has built out the next layer of infrastructure, which includes a new warehouse in Atlanta.

Despite that, higher operating costs mean analysts don't expect margins to kick much past 4% anytime soon. If that's the case, sales momentum will be key to sustaining that premium rating.

Looking beyond short-term factors, 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 fashion 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, and we think its ability to expand beyond that level will only be constrained by how well it manages the pace of expansion. Not a bad problem to have by any stretch.

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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Full year results (geographic breakdown at constant exchange rates):

As expected, sales growth is at the lower end of the 25-30% range, and rises 26% to £2.4bn.

A 19% increase in site visits and 7% rise in average order frequency both helped sales rise, as did a 1% increase in average basket value. ASOS now has 18.4m active customers, another 19% increase year-on-year.

Despite a tough trading backdrop, the UK delivered full year sales of £861.3m. That represents growth of 23%, with the rate of progress accelerating as the year progressed.

EU retail sales grew 28% to £739.1m. That came despite the group limiting sales growth to match extra capacity from the Euro hub distribution centre.

US sales rose 25% to £311.6m alongside a 19% increase in active customers. Rest of World sales grew 18% in constant currency to £443.2m.

Capital expenditure was £242m, with 50% spent on technology and transformation programmes. After this investment, the group's net cash position declined to £42.7m, down from £160.3m last year.

Looking ahead, capex guidance remains at £230-250m for the upcoming year and is set to fall as a percentage of sales going forward.

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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.