Online fast fashion retailer ASOS (ASC:AIM) slumps 9% to £63.98 as the AIM giant informs the market spending needs to rise to support its heady global growth.

Today’s share price correction serves as a reminder of the risks that come with investing in highly rated go-go-growth stocks, though half year results to February are still pretty impressive on numerous fronts.

STRUTTING ITS STUFF

ASOS’ half year results retail sales rose 26% to over £1.13bn, reflecting strong growth across the UK and overseas territories, as well as a 10% hike in profit before tax ticks 10% to £29.9m, a touch light of the £30.8m consensus as investments outpaced gross margin gains.

ASOS also reveals it received more than a billion site visits during the first half for the first time, although a 31% rise in international retail sales to £716.8m represents a slowdown from last year’s 42% growth rate.

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SPENDING SPLURGE

However, while ASOS leaves full year and medium term sales and EBIT guidance unchanged, ASOS says total capex will increase to between £230m-to-£250m in both the current financial year to August and the following two financial years.

As a result, the online retailer expects to be free cash flow negative this year and next, returning to free cash flow positive in the year to August 2020.

‘Alongside our investment in our people and our technology, we are accelerating investment in our distribution and logistics, laying the foundation for £4bn of net sales,’ says CEO Nick Beighton, ‘a further step in building ASOS into the world's number one destination for fashion loving 20-somethings.’

ASOS - APRIL 2018

Put simply, ASOS needs to invest more quickly to support the impressive levels of growth it is delivering. Therefore, it is speeding up some of its capital investment projects, notably in its distribution and logistics facilities, around the globe.

Targeting its wares towards fashion conscious 20-somethings, ASOS represents a pure-play on the clothing market’s channel shift to the internet and as Beighton reminds investors, ‘ASOS market shares remain relatively modest around the world, offering significant opportunities for continuing growth in the years to come.’

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THE EXPERTS’ VIEW

Reiterating its ‘buy’ rating, broker Shore Capital comments: ‘The bears will highlight the additional capital expenditure in full year 2018 and 2019 but there is no change to either sales or margin guidance in either the short or medium term. ASOS continues to win from the structural channel shift online and is laying the foundations for £4bn of sales over the medium term.’

One such bear is Canaccord Genuity’ Sanjay Vidyarthi, a seller with a £36.22 price target. In a note headed ‘Stopped clock moment’, the analyst says: ‘We have been consistent sellers of ASOS with a thesis that the cost of growth will continue to come in ahead of market expectations making the valuation hard to justify - today lends further support to our thesis.'

Yet Liberum Capital, a buyer with an £80 price target, writes: ‘While some commentators may view the capex investment as a negative, we see it is building more barriers in an industry that has typically had low barriers to entry but very high barriers to success.

'The capex investment will drive automation of distribution centres, increasing capacity and further improving the group’s already best-in-class IT infrastructure. This will continue to support the sustainability of top line growth.'

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Issue Date: 11 Apr 2018