ASC

Karen Hooi of Goldman Sachs has initiated coverage of online fashion retailer and long-standing Shares favourite ASOS (ASC:AIM) with a ‘buy’ recommendation and a 12-month price target of 455p, for 10% upside in the stock.

The broker’s support for the shares is based upon the belief – shared by many – the internet will continue to increase its clothing market share. According to retail experts Verdict Research, the internet accounted for only 4% of total UK clothing spend last year but this figure is expected to reach 10% by 2010. Verdict believes online clothing spend will grow at a compound annual growth rate of 29% between 2008 and 2012.

Apart from this favourable industry background, ASOS has the second most popular site with 3.4 million visitors a month. It is strongly committed to fast fashion – high volume and low-to-mid price range, which the broker believes will ‘outperform’. ASOS is seeking to drive sales by widening its product range and improving customer relationship management and service. The range will grow from 10,000 lines in April to 18,000 by Christmas.

This growth reflects brand and size extensions, new ranges such as petite and maternity, and the launch this month of ASOS Red, a branded clearance section, which will complement its existing success with brands such as Ted Baker (TBK).

Hooi’s forecasts call for earnings per share (EPS) to rise 61% in fiscal 2008/09 and 39% in 2009/10 to 13.2p and 18.3p respectively. Thereafter the broker anticipates further EPS growth of 38% in 2010/11 and 23% in 2011/12 to 25.3p and 31.2p. This takes the stock’s prospective PE down from a challenging looking 30.1 for this year down to just 12.7 for 2011/12, which looks much more palatable, given the forecast prodigious growth.

by John Marshall

The writer holds shares in this company