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ASOS - lockdown results in record profits

Sophie Lund-Yates, Equity Analyst | 8 April 2021 | A A A
ASOS - lockdown results in record profits

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ASOS plc Ordinary 3.5p

Sell: 5,344.00 | Buy: 5,354.00 | Change -14.00 (-0.26%)
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ASOS' revenue rose 25% to £2.0bn at the half year, ignoring the impact of exchange rates. That reflects a 25% rise in Retail Sales, with sales rising double digits in every region. Growth was particularly strong in the UK. This fed into a record underlying pre-tax profit of £112.9m - including a £48.5m benefit from the pandemic. This tailwind is expected to reverse when tourism and hospitality restrictions lift.

Full year expectations have increased because of the strong first half performance, the outlook for the second half is unchanged. ASOS remains cautious about the near-term economic outlook of its key consumers.

The shares were unmoved following the announcement.

View the latest ASOS share price and how to deal

Our view

A digital only set up means ASOS can keep trading during lockdowns. And trade it has. Yet another 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% in recent years. 5.9% isn't exactly a dizzying high, but 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. An acute awareness of the need to stay relevant was no doubt behind the acquisition of Topshop assets earlier this year.

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

A lot of ASOS' fortunes are outside of its control. 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.

And with marketing and infrastructure spending being ramped back up, the shopping list is getting longer, which could put a ceiling on profit growth.

A lower rate of returns is saving the group a lot of money, which will help stem some margin outflow. Problem is, this isn't likely to be a long-term tailwind. It's likely operating margins will dip in the medium term.

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. We think ASOS has operationally turned a corner, and could offer long-term potential for those happy with the external risks involved. Keep in mind though, an unclear medium-term picture of demand patterns means we don't know what margins are going to do.

ASOS key facts

  • Price/earnings ratio: 38.0
  • 10 year average Price/earnings ratio: 53.7
  • Prospective yield: 0.0%

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

In the UK, retail sales rose 39% to £800.4m, and ASOS gained online market share because of lockdowns. There was strong growth across Face & Body, activewear and casualwear. There was a reduction in occasion-led shopping, and average basket value decreased, but this was offset by an increase in new customers. Active customers have reached 7.8m, and rose 15%.

Profits were helped by more ''deliberate'' shopping habits, which means customers are less likely to return items.

Retail sales were also boosted by lockdowns in Europe, rising 18% to £580.1m. Trends were similar to the UK, in that average basket values fell 4% because of a shift to lockdown categories, but active customers rose 0.7m to 9.9m. France and Ireland performed particularly well, while Spanish sales fell because of adverse economic conditions for ASOS' demographic.

The US faced headwinds because ASOS relies more on occasionwear in the region. There were also issues with stock availability. Nonetheless, retail sales rose 16% to £225.7m. There are now 3.3m active customers.

Increased basket value helped retail sales rise 16% in the Rest of World region, reaching £313.7m.

Group gross margins fell to 45% from 47%, because of increased freight costs, exchange rate movements, and a preference for less profitable lockdown category items. Operating costs rose 9% to £780.3m, the biggest rise came from marketing costs. A lower return rate also helped keep distribution costs lower. However, operating costs as a percentage of sales fell to 39.5%, from 44.8%, meaning underling operating margins improved to 5.9% from 2.2%.

Net cash fell £315.5m to £92.0m, following the acquisition of Topshop assets in February.

The integration of Topshop brands is going to plan, and the one-off integration costs are expected to be around £10m, rather than £20m.

Looking ahead, ASOS said its capital expenditure guidance for the full year is unchanged at around £190m. The group expects the second half to be cash generative.

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 Refinitiv. 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.