Shares in online fashion retailer ASOS (ASC:AIM) rallied 7.9% to £32.63 on Thursday as sales growth over Christmas smashed analysts’ expectations, the strong festive showing suggesting management has fixed the operational issues that dogged the business in 2019.
Yet the absence of an earnings upgrade, with management pointing to an unchanged outlook, plus a significant drop in gross margin, kept a lid on the share price excitement early on.
ASOS’ MERRY CHRISTMAS
Underscoring the continued migration of retail sales from the high street to the internet, ASOS’ group revenue rose 20% to £1.1bn in the four months to 31 December 2019 with the one-time AIM darling citing a ‘good performance across all regions’.
That was well ahead of consensus of 14.4% growth thanks to a record Black Friday and suggests management’s focus on improving operations and execution is delivering results.
GROSS MARGINS UNDER PRESSURE
Despite the downbeat domestic sector backdrop, ASOS’ UK retail sales grew by 18% to £408.9m while international retail sales skipped 22% higher to £666m with the US and rest of world divisions leading the way.
The one negative was gross margin, which declined 170 basis points reflecting the impact of US duty and the price cuts required to pull in customers in ultra-competitive clothing markets.
For some time, ASOS has been outshone by its upstart rival Boohoo (BOO:AIM), so investors were clearly relieved it enjoyed similarly strong trading over the peak period. Operational missteps dented profits last year, but ASOS has addressed these issues, with improved stock, product choice and capacity driving sales.
Chief executive Nick Beighton enthused: ‘ASOS has delivered an encouraging start to the year. Strong customer acquisition activity supported by robust operational performance has driven good momentum in all our markets.’
He added: ‘It is still early in the year and much remains to be done, but we are encouraged by the progress we have made so far. We remain confident in our ability to capture the substantial opportunity ahead of us.’
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould commented: ‘International business is making a growing contribution for ASOS, which is encouraging for the long-term future of the group, and it no longer seems to be dogged by the IT and warehousing issues which contributed to a plummeting share price and more than one profit warning in 2019.
‘Less positively the company has been engaging in the dreaded “investment in customer acquisition”, retail speak for cutting prices to get people to buy products from its site or app.
‘Having got growth back on track, the next challenge for management is to boost the company’s wafer-thin margins.
‘This could be challenging, the emergence of ASOS is one of the big UK stock market success stories of the 21st century but it now has to navigate a much more competitive and therefore unforgiving landscape.’