ASOS has suspended sales in Ukraine, as serving customers became impossible after the invasion. The group has also decided to suspend sales in Russia.
In the last financial year, Russia and Ukraine represented about 4% of group revenue and around £20m of total profit.
ASOS shares fell 2% the morning after announcement.
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Our view
The ongoing crisis in Ukraine is going to have an effect on full year profits. The extent of this will depend on how long sales suspensions remain in place. Neither Ukraine nor Russia is a core market for ASOS, so from a purely operational perspective the picture hasn't changed too much.
Another development worth attention is ASOS' recent foray onto the London Stock Exchange's main market, from AIM. That could bode well from an investment perspective, because it means the shares are more likely to be included in fund purchases for index trackers -which aim to mirror the performance of the UK's biggest companies.
There are some bigger-picture benefits too.
The pandemic has permanently increased online shopping demand in our view. While impossible to say for sure, ASOS' head start here should, in theory, mean it benefits. This is probably why ASOS feels comfortable it can deliver £7bn of annual revenue, and double the size of the combined US and Europe business over the next 3-4 years. We believe the addressable market is there, but it will require near-perfect execution of expansion plans. That's an area ASOS has fallen short of before and there are no guarantees.
A balance sheet with almost £200m of net cash is a luxury in the retail sector, and gives it opportunity to pounce on acquisitions to help propel growth if they arise. It also gives ASOS space to stomach a degree of disruption. It has a decent track record here, with acquired brand Topshop doing well.
There are a couple of points to be wary of though. The tailwinds provided by COVID, including reduced returns rates, are starting to unwind. Added to the problems are global supply chain constraints, which as well as rising costs, means ASOS is struggling to get hold of enough of the right stock.
The main thing to watch is margins. While they aren't at dangerous levels, 5.3% is a bit thin. With disruption expected to continue, and spending set to ramp up, some damage is coming down the pipes. The group's targeting operating margins of just 4% over the next three to four years, suggesting management's buckling up for a bumpy ride.
Then there's the issue of demand. ASOS has said that demand has remained fairly strong, even as high streets in core markets have reopened. But we wonder exactly how that's going to shape up over the longer-term. The pandemic has chivvied ASOS' bricks and mortar rivals to up their own digital offerings, so the group's going to have to peddle a bit harder than it's used to if it's to grow market share and drum up interest for its growing own-brand offerings.
ASOS is also reliant on a growing partnership fulfilment arm, where brands supply inventory and ASOS collects a commission. Progress in this higher-margin part of the business is key if the group's to achieve sustainable operating margins above 8% in the future. The group's expanding partnership with Reebok and adidas suggest there's a runway ahead, but the pandemic may have pushed some brands to ramp-up their direct-to-consumer offerings, which could throw a spanner in the works.
All of these strategic turning points come at a time when the CEO and Chair are leaving the business. Any change of senior leadership brings an element of transition and strategic risk.
ASOS has some exciting growth prospects. Its strong proposition and growth plans in the US mean the long-term picture is still attractive in our view. But looking to the near-term, the group will be disrupted by supply chain and costs problems. The price to earnings ratio of 17.4 is significantly lower than average.
ASOS key facts
All ratios are sourced from Refinitiv. 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.
First quarter results (13 January 2022)
Revenue in the four months to 31 December rose 5% to £1.4bn, excluding the impact of currency changes, which was in-line with guidance. This reflected growth in the UK, US and Europe, which was tempered by a decline in Rest of World as delivery delays weighed.
Full year guidance is unchanged for revenue growth between 10% and 15% and underlying profit before tax between £110m and £140m.
Sales in the UK beat expectations and increased 13% to £645m as demand for going-out-wear improved. In the US sales rose 11% to £172.6m, but were held back by supply chain issues and port disruption. EU sales rose more slowly at 2% to £390.2m, as covid restrictions weighed on demand for occasionwear. Longer delivery times meant sales in Rest of World declined 15% to £185.1m.
Discounting and increased transport costs meant margins fell by 4 percentage points to 43%, as expected.
The group mentioned it's raised its prices to offset cost inflation.
ASOS now has 26.7m active customers, with 0.3m added in the period. This reflects a slowdown in customer growth as the group laps last year's strong numbers.
Topshop brands, purchased through the Arcadia acquisition in February 2021, saw sales more than triple. And the group's fulfilment partnership with Reebok and adidas in the UK will be expanded to the rest of Europe this year. This initiative and other strategic goals together with the costs associated with a LSE listing are expected to total between £10m and £13m during the first half.
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