ASOS plc (ASC) Ordinary 3.5p
HL comment (16 October 2019)
Excluding the impact of exchange rates, ASOS' full year revenues grew 12%, to £2.7bn. Higher-than-expected expansion costs in the EU and US saw pre-tax profit fall 68% to £33.1m, although this was slightly better than analysts expected.
The group said "the majority of the transformation program" has been completed, and ASOS has made a "solid start" to 2020.
The shares rose 13.2% following the announcement.
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 this 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, proving the retail malaise isn't just on the high street. Competition is tough, with rivals dangling cheaper price tags in front of customers. In order to compete, ASOS has been cutting its own prices, which doesn't help margins.
That's not to say it's all bad news. The group is confident the hard work is done now, meaning the new distribution set ups in the US and EU should start to reap their intended rewards. All being well, that should see the paltry 1% operating margins start to recover, and analysts expect operating profit to climb in the next few years. This isn't guaranteed though, and big plans for the future means there's no dividend on offer, as the group prioritises reinvestment.
International markets are ASOS's biggest pocket of opportunity, as the more mature UK business can't keep growing forever. Excitement around what the future holds overseas underpins a price to earnings ratio of 41.9, which although lower than the longer term average, is well above most retailers.
A rating like that is fitting for what is still very much a growth story. But it does also mean there's scope for the shares to fall significantly if things don't go to plan - as investors know too well after this year.
Full Year Results
The group has 20.3m active customers (2018: 18.4m), with almost 70% coming from international markets. Gross margins fell to 48.8% from 51.2%, due to increased freight and duty costs in the US, and underperformance in the US and EU.
In the UK, retail sales increased 15% to £1bn. That reflects increased demand from existing customers and better conversion rates, while third party sales reached £9m, compared to £7.4m last year. ASOS says the UK is highly promotional, and has discounted to boost customer engagement. It nonetheless remains mindful of protecting profits.
US sales rose 4% at constant currency, to £843.5m. Performance was held back by problems at the Atlanta warehouse, causing lower availability of some key products. That impacted average basket values, with better availability in its cheaper items.
Active customers grew 10% to 7.8m in the European Union, which fed into a 9% increase in sales. This was lower than expected, as warehouse issues impacted stock availability, particularly in the third quarter. Sweden and the Netherlands performed very well following the launch of local language websites, with similar launches now complete in Denmark and Poland.
In Rest of World revenues were £506.8m, up 14% ignoring the impact of exchange rates. That reflects strong growth in Russia and the Middle East.
Warehouse transition costs saw operating expenses rise 14% to £1.3bn, and higher capital expenditure means net debt is now £90.5m, compared to £42.7m net cash last year.
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