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ASOS - sales trends slowing, full year in-line

Sophie Lund-Yates, Equity Analyst | 15 July 2021 | A A A
ASOS - sales trends slowing, full year in-line

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ASOS plc Ordinary 3.5p

Sell: 2,530.00 | Buy: 2,532.00 | Change 138.00 (5.76%)
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Underlying retail sales rose 20%, to £1.2bn in the third quarter, ignoring the effect of exchange rates. That includes growth in all regions except Rest of World.

ASOS said COVID uncertainty and bad weather meant trading in the last three weeks of the quarter weakened. The group also warned that global supply chain issues, including freight capacity shortages and delivery delays, are set to continue.

However, underlying pre-tax profit expectations for the full year are unchanged.

The shares fell 8.6% in early trading following the announcement.

View the latest ASOS share price and how to deal

Our view

The market was disappointed by ASOS' latest trading update.

COVID uncertainty lingers, meaning customers in the core UK market started to rein in their purchasing. If there's any doubt about when so-called freedom-day is going to happen, ASOS' young, core customers will hold off on buying party dresses. Next quarter will give a better indication of the sales pace ASOS can achieve in more normal times.

We're also keeping an eye on margins. Gross margins are coming under pressure because ASOS is discounting to keep demand high in a very competitive environment. Return rates are starting to increase- which saved ASOS a lot of money during the lockdowns. Together with marketing and infrastructure spending being ramped back up, operating margins could dip. They're currently around the 5% mark, which is much better than they have been, but a bit thin to stomach any severe knocks.

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.

However, there are some bright spots. It's wrong to brush past overall sales growth of 20% for the last quarter, which is another in a string of double-digit increases. COVID accelerated the shift to online, meaning digital only players, like ASOS, should stand to benefit over the long-term, even if exact sales trends are tough to map right now.

We're also impressed by efforts to boost customer engagement. The product proposition has undergone some serious work, boosted more recently by acquisitions - including Topshop assets - and the Nordstrom joint venture. The Nordstrom deal should boost performance in North America, which is an important growth opportunity.

Net cash of around £92m on the balance sheet is also a real bonus. It means ASOS can pounce on any other assets it thinks might propel growth, and it means the group can stomach some ups and downs.

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 is one of the better placed names in its sector. The shares currently change hands for a lot less than the ten-year average. Some reduction was to be expected as the business matures, but we think there could be some upside. The valuation also reflects ongoing uncertainty about exactly what patterns demand will look like, so we can't rule out ups and downs and investors need to take a long-term view.

ASOS key facts

  • Price/earnings ratio: 28.8
  • Ten year average Price/earnings ratio: 53.0
  • Prospective dividend yield (next 12 months): 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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Third quarter trading details (figures given are underlying and constant currency)

The number of ASOS' active customers now stands at 26.1m, increasing by 1.2m in the quarter.

In the UK, which makes up 42.4% of retail sales, sales rose 36% to £526.4m. Sales were helped by ASOS' decision to increase its discounts on clothes, which helped keep demand high as physical shops reopened. Sales trends were weaker towards the end of June.

It was a mixture in Europe, where the EU, especially Germany, did well but conditions were more challenging in Southern Europe. This was blamed on tourism restrictions, which affects demand for ASOS' key 20-something customers. Retail sales rose 15% overall, to £388.3m.

Growth was stronger in the US, with sales up 20% to £144.8m.This reflects an improved product offering, more demand for going-out clothes, and a positive impact from stimulus cheques. Rest of World sales fell 3% to £182.6m, where ASOS faced disruption to its deliveries and lost out to local competition.

The group said returns rates are starting to increase back to normal levels.

Gross margins fell 1.5 percentages points, reflecting adverse exchange rates, higher freight costs and the lower margin ''lockdown'' items being sold.

ASOS also announced a joint venture with US-based retailer Nordstrom to ''drive growth in North America''. Nordstrom will acquire a minority interest in the Topshop, Topman, Miss Selfridge and HIIT brands, and Nordstrom will sell ASOS Brands.

The group issued a £500m convertible bond in April.

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.