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ASOS - full year profit boost, but outlook uncertain

Sophie Lund-Yates, Equity Analyst | 14 October 2020 | A A A
ASOS - full year profit boost, but outlook uncertain

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ASOS plc Ordinary 3.5p

Sell: 4,923.00 | Buy: 4,927.00 | Change -59.00 (-1.19%)
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Group revenue rose 19% to £3.3bn for the full year, reflecting double digit sales growth in all geographies. Higher sales combined with reduced marketing and returns costs, meant pre-tax profit rose from £33.1m last year to £142.1m.

ASOS said there has been a "solid" start to the new financial year, but is "retaining caution on outlook for consumer demand whilst economic prospects and lifestyles of 20-somethings remain disrupted". The important US market also struggled in the second half, as it continues to be more severely affected by Covid-19 compared to the EU.

The shares fell 7.2% following the announcement.

View the latest ASOS share price and how to deal

Our view

ASOS was in a much better position than other retailers this year. A digital only set up means it was able to keep trading, and trade it did. A double digit climb in sales is no mean feat in this environment.

Perhaps most dizzying is the improvement in operating margins. We've been watching these like a hawk since they dipped to a paltry 1% not too long ago. While 4.6% might still lag behind peers - it's a significant step in the right direction. (That margin surge is likely temporary though - on which more later).

It's also hard not to commend the group for its improvements in customer engagement. This doesn't tend to get a shout out in headline numbers, but in today's saturated marketplace this shouldn't be overlooked. Trendy (and less expensive) rivals like boohoo are snapping at ASOS' heels, so the fact that it's been able to keep millennial eyes on its screens is good going.

But it's not a case of "job done".

A lot of ASOS' fortunes are outside of its control right now. A rough economic outlook and disruption to way of life for its core customers, means mapping future demand is pretty much an impossible task.

There's also the issue of continued gross margin (sales revenue minus the cost of the goods sold) pressure. A highly competitive environment means ASOS continues to slap sales stickers on stock, and a long-term shift away from more profitable going-out or office wear will make this a bigger problem.

At the moment headwinds are being more than offset by savings elsewhere. Marketing spending was seriously cut back in lockdown to prevent warehouses being overwhelmed, and a lower rate of returns is saving the group a lot of money. Problem is neither are long term solutions, and when ASOS' spending starts to normalise operating margins will thin once again.

The planned response leans heavily on new, more efficient (and in some cases, automatic) warehouses. When things are going well ASOS can leverage these big facilities to service increased sales, boosting profits as they go. But - and this is a big but - if sales were to turn sour, the expansion just adds additional fixed costs, and margins will wither.

ASOS' medium-term is going to be governed by external forces. It's put in a lot of leg work and we're genuinely impressed by improvements to its proposition - which in a normal world would stand it in good stead. But until we have a clearer picture of demand patterns, we would suggest exercising caution. A knock to trading now could see the group shed some serious profit.

ASOS key facts

  • Current 12m forward P/E ratio: 47.2
  • Ten year average 12m forward P/E ratio: 54.2
  • Prospective yield: 0%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full year results

ASOS now has 23.4m active customers, an increase of 3.1m, with particularly strong growth in the EU and Rest of World regions. Average basket value rose 1% to £71.92, as an increased number of items per order was mostly offset by lower average prices. This reflects trends in the second half, when lockdown meant customers swapped to cheaper items like loungewear.

In the UK, retail sales rose 18% to £1.2bn while active customers rose by 7m, or 11%. The increase was attributed to improvements in product and social media engagement. The change in shopping habits during lockdown meant average basket value was flat.

Within Europe, Italy and France performed well, and the resolution of warehouse issues meant EU customers had access to better stock and delivery options. Retail sales rose 22% to £1.0bn, as a 14% rise in orders offset a small decline in average basket value.

The US reached retail sales of £401.9m, which was an increase of 16%. However performance was disappointing in the second half, with consumer demand severely impacted by Covid-19. US consumers feel less financially supported than their European peers, and this demand issue was compounded by ASOS' inability to get products into the US because of restricted air-travel.

Retail sales of £587.9m were up 18% in the Rest of World region, with orders, basket size and number of active customers all rising. There was particularly strong growth in Australia and the Middle East.

Group gross margin fell from 48.8% to 47.2%. That reflects increased airfreight costs, increased popularity of lower margin products and the group's decision to continue discounting prices. However, operating costs rose just 7% to £1.4bn, falling from 47.5% of sales to 42.8%. As well as the planned reduction in non-strategic costs, this reflects improved distribution methods in the US, increased automation in the EU and a £45m benefit from reduced returns. Operating margins for the year stood at 4.6%.

Compared to net debt of £90.5m last year, ASOS finished the year with net cash of £407.5m. This reflects £239.4m in proceeds from the capital raise earlier this year, as well as better stock management. ASOS expects to be cash generative in the year ahead, excluding the stock tailwinds provided by Covid-19.

Capital expenditure delayed due to coronavirus will be rephrased into next year, when ASOS plans to spend £170m- £180m. This will include investment in technology and warehousing infrastructure. A new fulfilment centre is being built in the UK to increase capacity, ahead of the previous 2023 deadline. ASOS also said warehouses are operating at normal capacity, despite social distancing measures.

The group also said the rapid increase in its efficiency brought on by the disruption means making improvements will be more challenging from here.

Find out more about ASOS shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.

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