Online fashion retailer ASOS (ASC:AIM) has told investors to expect far more profit from the business this year, helped by a predictable lockdown sales boom.
ASOS now expects pre-tax profit for the year to 31 August 2020 in the £130 million to £150 million range, an enormous jump on the £58 million implied by consensus forecasts. The company sees revenue around 17% to 19% up on last year, also higher than the 15.1% growth estimated by consensus.
Unsurprisingly, shares in ASOS jumped, although today's rough 4.5% rally to £44.04 may leave some investors disappointed given the scale of the guidance hike. One reason for the sober response may be the stock's already sharp pandemic recovery.
ASOS shares have soared 315% since early April, prompting analysts at broker Shore Capital to argue that the valuation is up with events.
DEMAND SURPRISE
ASOS’ short-but-sweet pre-close trading update highlighted a strong operational performance and year-on-year improvements in profitability, supported by stronger than anticipated underlying demand.
The online retailer for the globe’s fashion-loving 20-somethings also attributed the upgrade to lower return rates driven by sales mix changes. ASOS had expected returns to normalise once lockdown measures eased and customers were both able to ship returns and felt more comfortable doing so.
However, the web-based fashion seller has seen a significant and sustained reduction in returns rates since April due to higher sales from ‘lockdown’ categories such as activewear and face and body categories, together with what it calls ‘more deliberate purchasing across all product categories, even when sales momentum has improved.’
It appears consumers have become less frivolous and event-led during the pandemic, with social life on hold, and more reluctant to make outings to return items due to fears over the virus.
UNCERTAINTY STILL CLOUDS FUTURE
Nick Beighton-bossed ASOS warned ‘the consumer and economic outlook remains uncertain and it is unclear how long the current favourable shopping behaviour will persist’, adding that the extent of its recent outperformance and any impact beyond this financial year ‘will be driven by how customer shopping behaviour normalises.’
Broker Shore Capital pointed out that ASOS has ‘a strong balance sheet, having raised £240 million through an equity raise back in April. This together with momentum and the opportunity to leverage its global infrastructure leaves it well placed to fulfil its ambition to be a global leader in fashion.’
Numis Securities reiterated its ‘buy’ rating on ASOS and updated its 2020 forecasts to the mid-point of management guidance. ‘Our outer year forecasts rise more modestly, looking for full year 2021 pre-tax profit of £125 million, up 25% on our and consensus forecasts and equivalent to a 3.4% operating margin,’ explained the broker.
‘Should current consumer behaviour persist, or underlying margin progression be more pronounced than we assume, we see upside risk to this outlook.’
