Most retailers would give their right arm to report third quarter top line growth north of 20%, as global fast fashion purveyor ASOS (ASC:AIM) has today. So why have shares in the AIM giant and online structural growth winner slumped 11.3% to £57.64 on Thursday?
GROWTH GUIDANCE DISAPPOINTS
The answer is ASOS is a highly-rated stock due to elevated growth expectations and total group revenue growth of 21% to £823.9m for the four months to 30 June is below the 25.3% called for by consensus.
Furthermore, the pure-play online fashion and accessories seller focused on 20-somethings warns full year sales growth will likely be ‘towards the lower end’ of its previously guided 25%-to-30% range as the retailer has been managing demand around major infrastructure projects.
Nevertheless, ASOS remains on track to deliver full year pre-tax profit in line with the £101m consensus of analysts’ estimates and leaves medium-term guidance unchanged at 20-25% sales growth with a 4% EBIT margin, while there’s no increase in current year capital expenditure guidance, left intact at £230-£250m.
For the uninitiated, back in April ASOS said spending would need to rise materially on logistics and distribution to support its rapid and internationally-derived growth, news which didn’t go down well with the market at the time.
Ambitious ASOS, which has just appointed former ITV (ITV) head honcho Adam Crozier as chairman, is laying the foundations for £4bn of sales over the medium term, although the upgraded spending guidance means the retailer expects to be free cash flow negative this year and next, returning to a free cash flow positive position in the year to August 2020.
POSITIVE MARGIN SURPRISE
Overall, today’s third quarter missive is highly positive with reported retail sales up more than 20% in the UK, EU and US and Rest of the World revenue 11% ahead, reflecting firm international market share gains. Retail gross margin has surprised on the upside, increasing ahead of plan by 130 basis points, while the number of active customers, defined as having shopped in the last year, is up an impressive 20% at 18m.
‘I am pleased with the way the business has traded over the last four months and we are on track with our plans for the year,’ says CEO Nick Beighton. ‘We delivered good sales growth, particularly in the UK, better than planned gross margin alongside significant progress on our infrastructure investments.’
Beighton also insists fourth quarter trading has started well, ‘particularly in terms of full price sell through’ and remains confident of delivering yet another year of strong growth.
THE ANALYSTS’ VIEW
Shore Capital scribe Greg Lawless reiterates his ‘buy’ rating, insisting ‘ASOS continues to be a structural winner given the channel shift online together with its global aspirations. The company continues to build out the infrastructure to support a £4bn revenue business, from circa £2bn today.’
With an £80 price target, Liberum Capital sees any further pressure on the ASOS share price as a good buying opportunity, arguing ASOS’ capital expenditure (capex) investment will sustain top line growth for the future.
‘ASOS’ focus on becoming “the world’s number-one online shopping destination for fashion-loving 20-somethings” has created a key point of differentiation versus its rivals, including other online players. Capex investment is an absolute requirement in a world where technological advancements are speeding up and the development of AI, AR and augmented tools is an absolute requirement,’ says Liberum.
‘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.’
Russ Mould, investment director at AJ Bell, comments: ‘A third quarter trading update from online fashion retailer ASOS is a mixed bag. On the one hand profit margins grew ahead of expectations in the period, on the other hand sales disappointed.
‘The market appears to be more focused on the latter, particularly given guidance that growth for the full year to 30 September will fall at the lower end of expectations.
‘The negative market reaction should not come as a surprise as ASOS is still considered to be a growth stock - something which is reflected in its high equity valuation.
‘The continuing spend on infrastructure and the wider proposition offers another reminder that, while it does not face some of the costs of its bricks and mortar rivals, there are still material costs of doing business for an online operator like ASOS.'
