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ASOS - operational faux pas weigh on Europe and US

Nicholas Hyett | 18 July 2019 | A A A
ASOS - operational faux pas weigh on Europe and US

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ASOS plc Ordinary 3.5p

Sell: 3,340.00 | Buy: 3,341.00 | Change -4.00 (-0.12%)
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Retail sales in the four months to 30 June rose 11% at constant currency, reaching £894m. That reflects strong sales growth in the UK and Rest of World divisions, but was offset by weaker, albeit still positive, growth in the EU and US.

Operational issues in the US and EU are expected to continue for the rest of the year and guidance for the full year has been reduced accordingly.

The shares fell 19.5% in early trading.

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Our view

A lot of the retail sector's struggles have been put down to online competition - and ASOS' difficulty keeping up with demand in some regions is testament to that.

But the fact the group is not able to smoothly roll-out the infrastructure to support the boom in online shopping is a problem nonetheless. Not having stock available is a massive faux pas for a retailer.

The ongoing problems, a source of three profit warnings in seven months, are particularly frustrating for investors because the group encountered similar growing pains a few years ago. But over time they should be resolved.

With that in mind, perhaps of greater concern is December's revelation of pricing pressure in France and Germany. Traditional high street stores are upping their game online, and new challengers like Boohoo are moving fast to grab market share. Competitively cutting prices will keep the virtual tills chiming, but is a bit of a nightmare for profitability.

Extra competition means investment is required. Margin guidance has crumpled, and the extra marketing and distribution costs mean they're only likely to inch up from here. Not what you want to see from a company trading on a pretty punchy PE ratio of 35.7 prior to today's announcement.

On the plus side, ASOS has proven adept at using social media to build and maintain relationships with customers, and there's no reason the formula won't remain successful. After all, it only has a small share of the vast clothing markets of the UK, Europe and the US, and is still growing rapidly.

Long term we still think online fashion represents a significant opportunity, and ASOS has the balance sheet and marketing nous to capitalise on that. But the last few months have been a major shock to the system and there could yet be more pain to come.

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Third Period Results (Constant Exchange Rates)

Sales in the EU and US rose just 3% and 6% to £269m and £121.4m respectively, as the overhaul of these regions' warehouse and technology provision took longer than anticipated. This resulted in reduced stock availability, slower sales, and a higher cost base in both regions. The projects are expected to be complete by the end of Autumn.

The UK and Rest of World divisions, which are serviced out of the Barnsley distribution centre, continue to trade well. Sales grew by 16% in both regions, hitting £334.1m and £169.5m respectively.

Despite the operational challenges, customer engagement continues to improve. Site visits rose 16% year-on-year, with total orders rising 14% year-on-year to 24.8m. Uptake of in-house brand, ASOS Design (which was unaffected by the operational problems in the US) was good.

Problems with stock availability and extra transformation costs are expected to weigh on full year performance. Profits are now expected to be between £30-35m. Capital expenditure expectations remain unchanged, although management now expects the group to finish the year with net debt of £100m.

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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.