Asos’s [ASC.L] most recent annual results revealed a pre-tax profit of £33.1m, down from £102m in the 2018 fiscal year, despite sales rising 13%. The nearly 70% profit fall was driven by warehouse issues in Germany, the US and the UK as it expanded. Lower consumer confidence, currency weakness, discounting and poor stock availability also had a negative impact.
The online retailer has also been hit by the growth of rivals such as Boohoo [BOO], whose share price is up by over 86% so far this year to 300p (intraday Monday), compared with a year-to-date gain of almost 40% for Asos. Boohoo’s market capitalisation is at £3.4bn, over 30% higher than Asos’s £2.6bn.
Assessing the growth journey’s costs
“A rise in sales and a fall in profit tends to suggest there is either something wrong with how the business is run or its growth journey is incurring large costs,” said Russ Mould, investment director at AJ Bell. Both factors could apply to Asos, “which is finding its global expansion slightly problematic”, he added.
“Although a sharp drop in earnings and a sharp rise in net debt make for ugly reading, this is arguably old news. Investors are now bidding up Asos’s shares because management are confident they have a solution to fix operational issues,” Mould noted. Since July, Asos’s share price has risen by close to 60% from a low of 2,033p.
“Although a sharp drop in earnings and a sharp rise in net debt make for ugly reading, this is arguably old news. Investors are now bidding up Asos’s shares because management are confident they have a solution to fix operational issues” - investment director at AJ Bell, Russ Mould
Mould said Asos’s share price can recover further if it sells what “consumers actually want to buy” and provided that the company’s warehouses have adequate stock and can send out products quickly. In its latest results, the company said it is already seeing “encouraging signs of recovery” and that there was a substantial global opportunity ahead.
“Asos has issued profit warnings, been punished by the market and is now going tail between its legs saying it will try harder. That’s given it some breathing space to get things back in order. But failure to drive profits back up, and at a decent pace, will mean shareholders won’t be so forgiving next time,” Mould warned.
A cautious mood
Other analysts have been equally cautious, with any optimism based mainly on Asos’s fashion and warehouse improvements. For The Motley Fool contributor Edward Sheldon, Asos’s international sales potential, particularly in the US, is a bright spot. “There is no online retailer that offers the wide range of clothes and brilliant shopping experience that Asos does,” he said.
For the fiscal year ending 31 August 2020, analysts expect earnings per share of 56.4p, rising to 82.5p in 2021. The consensus rating for Asos stock is “hold”, with an average target price of 3,295p.
But Asos’s trend-setting technology might be the catalyst for significant share price gains, other analysts have argued.
Investment has helped the company’s tech offering go from “strength to strength”, CEO Nick Beighton said. This has involved developing Asos’s personalisation engine, “including improvements to [the company’s] recommendations algorithms”.
|PE ratio (TTM)||105.20|
|Quarterly Revenue Growth (YoY)||12.70%|
Asos share price vitals, Yahoo Finance, 02 December 2019
The next global retail giant?
The company’s technology offering includes software that detects buying trends and responds to them instantly, which improves customers’ chances of ordering the right size of a chosen item the first time, according to Atlantic House Fund Management fund manager, Fahad Hassan. This could make Asos into a global retail giant, he said.
“Asos makes full use of the data it collects to see if something isn’t selling and switch the emphasis to something that is,” Hassan said. “This way you don’t tie up money in things that aren’t shifting. It comes from having good data and using it effectively, and Asos’s systems are better than rivals’ in this respect. The algorithm that does this is better than anything Amazon has and will continue to improve.”
Hassan went as far as to describe Asos as a “British tech firm being ahead of the game. It is demonstrating not only fashion know-how, but also tech know-how.”
“It is demonstrating not only fashion know-how, but also tech know-how” - Atlantic House Fund Management fund manager, Fahad Hassan
This potential strength means Asos could become a leading provider of licensed technology and software to other consumer-focused firms. The key test will be how the company performs in its next set of annual results.