Shares in online fast fashion retailer ASOS (ASC:AIM) rallied 10.5% to £24.96 as the one-time stock market darling maintained full year guidance and said it will move from AIM to the Main Market by the end of February.

Given its market cap north of £2.2 billion, ASOS should qualify for a place in the FTSE 250 index later this year and benefit from index funds buying its stock.

RELIEF RALLY

Group sales in the four months to December 2021 were up 5% in constant currency, in line with recent guidance, though constrained by industry-wide supply chain disruption and slower customer growth amid increased uncertainty surrounding the Omicron variant.

There was relief as ASOS, whose shares have slumped on a series of downgrades, left full year guidance unchanged, particularly in light of rival Boohoo’s (BOO:AIM) nasty profit warning just before Christmas.

ASOS continues to guide for full year revenue growth in the range of 10% to 15% and adjusted pre-tax profit of between £110 million to £140 million.

While UK sales growth exceeded expectations in the four months to December, supported by robust festive trading and demand for going out wear, the website for fashion-loving 20-somethings experienced a mixed international performance with the EU and US impacted by the fourth Covid wave and supply chain disruptions respectively.

Gross margin decreased by 400 basis points to 43% driven by heightened clearance activity to shift slow-moving stock and higher freight costs to circumvent supply chain problems, though ASOS expects these trends to improve ‘across the remainder of the year as peak-related supply chain bottlenecks ease and stock profile normalises’.

OVERDUE MAIN MARKET MOVE

The other big news is the business will shortly switch its listing from AIM to the London Stock Exchange’s (LSEG) Main Market.

Mat Dunn, chief operating officer, said: ‘Our listing on AIM for the past 20 years has been an important part of ASOS’ development, but the time is now right to move to the Main Market as we focus on delivering our medium-term guidance and longer-term growth ambitions.’

AJ Bell investment director Russ Mould commented: ‘Once a posterchild for the AIM Market, ASOS is finally upping sticks and moving its stock listing to London’s Main Market.

‘AIM has historically been a place for young growth companies. Once they start to become a much bigger business, it is only natural to shift listings to the Main Market which is more the domain of longer-established companies or businesses that have successfully disrupted a market and are now generating decent profits. ASOS certainly fits in the latter category.’

Mould insisted: ‘ASOS should have made the move years ago given how it has progressed from being a UK business selling goods mimicking those worn by celebrities on the TV or in films, to now being an international online retailer.’

THE BROKERS’ VIEW

Numis, which has a ‘buy’ rating and £36 price target on ASOS, commented: ‘Near-term forecast uncertainty does feel elevated, but ASOS aren’t the only business facing that dynamic, and as a more normal trading environment emerges we see good long-term value in the shares in the wake of the recent pullback.’

Liberum Capital stuck with its ‘hold’ rating, though it reduced its price target from £35.60 to £23.

‘The company has maintained guidance but after a slow start to the year, there still remains a lot of work to be done to achieve this’, cautioned the broker.

‘While ASOS has made significant technological and infrastructure progress over the last few years, significant cash has been burnt to achieve this and execution has been a source of disappointment historically.’

Disclaimer: The author and editor of this story both own shares in AJ Bell, owner and publisher of Shares

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Issue Date: 13 Jan 2022