Global online fashion store ASOS (ASC:AIM) disappoints the market with slowing growth and weaker-than-expected margin guidance. A near-14% share price fall to £54.65 highlights the tightrope walked by stockmarket darlings trading on demanding ratings.


Web chart - ASOS - March 14


The web-based fast fashion phenomenon's second quarter missive reveals that group retail sales grew 26% to £136.65 million for the two months to 28 February. While most retailer's would give anything to generate such a heady top line advance, the growth rate falls short of consensus expectations of 32.5% and triggers selling over at (BOO:AIM), the pure-play online fashion peer whose IPO investors smiled upon last week.


ASOS' sales growth slowed to 21% in the UK versus a 37% advance over the first four months of the financial year to August, not helped by a sluggish February.


Yet ASOS is predominantly an international business these days and strutted its stuff in both the US and Europe, where retail sales surged ahead 41% and 57% to £14.5 million and £40.3 million respectively.


Letting the side down overseas was the Rest of World region, where 3% revenue growth to £33.5 million missed consensus by a mile, an underperformance mainly reflecting sterling appreciation against the Russian rouble and Australian dollar.


The £5.2 billion cap unnerves investors by warning increased investment will crimp earnings. ASOS is guiding towards a 6.5% year-to-August EBIT (earnings before interest and tax) margin, below expectations due to a step up in investment in UK and German warehousing, IT and start-up costs for China. The good news is this capital expenditure hike is designed to boost sales capacity to £2.5 billion per annum, £1 billion north of previous guidance and highlighting the immense growth opportunities ahead.


Today's share price reaction is likely to look overdone given ASOS' enviable metrics for the overall half to February. Benefiting from the structural spending shift to the web and mobile devices, the retail winner grew sales 34% to more than £472 million. ASOS also ended the period with 8.2 million active customers, up 36% year-on-year and is on course to reach its £1 billion annual sales target in the current fiscal year.


The analyst community has mixed views on the stock following the trading update. Numis Securities sticks with its positive stance, urging clients to 'buy' with a £75 price target. Panmure Gordon expects consensus taxable profit estimates to drop from £69 million to £65 million following today's stumble, reiterating its 'hold' rating and downgrading its price target from £61.26 to £60.51.


N+1 Singer, also with a 'hold' rating and £62.50 price target, says the update highlights 'strong continuing growth in some overseas regions and also the UK, albeit slightly softer than hoped'. Furthermore, the broker points out that 'as ASOS internationalises overseas FX fluctuations become increasingly relevant meaning the recent appreciation of sterling has seen sales slow in several markets. Nevertheless the investment in warehousing highlights management remains bullish about future growth prospects and these FX headwinds should moderate at some point in time.'

Issue Date: 18 Mar 2014