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ASOS - sales better than expected as operations improve

Sophie Lund-Yates | 23 January 2020 | A A A
ASOS - sales better than expected as operations improve

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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: 2,987.00 | Buy: 2,997.00 | Change 63.00 (2.15%)
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Group revenue rose 20% to £1.1bn in the four months to 31 December 2019. That was better than expected, thanks to a good performance across all regions, increased customer engagement and a record Black Friday.

The group's full year outlook remains unchanged though, as ASOS invests in customer retention and long-term growth.

The shares rose 8.6% following the announcement.

View the latest ASOS share price and how to deal

Our view

Ten years ago, online retailer ASOS had just 1.2m active customers, and sales were in the millions, not billions. The group's enjoyed remarkable progress since then, but it hasn't been smooth sailing.

Poor execution of international expansion led to not one, but a string of profit warnings, and an all-round disappointing performance last year. Not only did the new warehouses push up costs, it meant management took its eye off the core business, compounding already negative results.

The wider environment isn't helpful either. Competition is tough, with rivals dangling cheaper price tags in front of customers. In order to compete, ASOS has been cutting its own prices and the group also has to contend with extra costs associated with processing free returns for customers.

But ASOS could be turning a corner. It seems to have its house in order now, with product choice, stock and capacity problems ironed out. Crucially, the new distribution set ups in the US and EU are starting to reap their intended rewards.

International markets are key to future growth, since the more mature UK business can't keep growing at its current pace forever. Leveraging new, and expensive, distribution facilities should help boost ASOS's historically disappointing operating margins (just 1% at the moment) as increased sales rattle through the warehouses. Of course, growth in the EU and US cuts both ways. If sales are lacklustre, international expansion just adds additional fixed costs.

The bull case for ASOS rests on high hopes for the group's margin and profit potential - and the excitement around what the future holds underpins a price to earnings ratio of 43.5.That's lower than the longer term average, but is well above most retailers, and the focus on rapid growth means there's no dividend on offer either.

ASOS is still very much a growth story. But the rating does mean there's scope for the shares to fall significantly if things don't go to plan. It would be good to see a longer run of positive news, but for now ASOS seems to be moving in the right direction.

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Trading update (constant currency)

Total retail sales rose 20%, reflecting a 20% increase in orders, and 1.4m extra active customers. ASOS attributed the strong sales growth to the Black Friday weekend, supported by improvements in product choice, stock availability and operational capacity.

Gross margins declined 1.7 percentage points, following US duty and increased marketing spend.

UK retail saw an 18% rise in sales to £408.9m, while the US recorded growth of 20% to £139.3m. Within the rest of the EU, there was a 22% rise, with sales reaching £332.5m, and the Rest of World division rose 23%. In total, international sales now account for 62% of retail sales, from 69% of total active customers.

CEO Nick Beighton said the "focus for this year is to further enhance our capabilities and leverage the investments we have made. It is still early in the year and much remains to be done, but we are encouraged by the progress we have made so far."

Find out more about ASOS shares including how to invest

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