Earnings

How will ASOS’ share price be affected by interim results?

Online clothes retailer ASOS [ASC] is due to post interim results tomorrow. Investors will be keen to see how the ongoing pandemic has affected sales, and the company’s share price.

ASOS has reported a series of profit warnings since December 2018 where its share price was hit by increased online competition from the likes of Boohoo [BOO], the costly and troubled development of new international warehouses, as well as stock shortages.

Since then its share price has slumped 79%, from a record high of 7,730p in mid-March 2018 to 1,608p in mid-March this year. It’s woes have been amplified further, seeing the share price slip a further 52% (through 3 April), as concerns remain over the impact of the Coronavirus pandemic on demand, and the company's supply chain. Its interim results on Wednesday will provide answers as to whether ASOS is back in style, or back in trouble.

 

 

Encouraging updates

ASOS’ last trading update was encouraging, as the four months to December revealed a 20% year-on-year increase in sales on a constant currency basis to £1.1bn. UK demand was up by 18% and international by 22% as the group was boosted by a record Black Friday and better product choice and stock availability.

UBS analysts are, according to Proactive Investors, expecting 18% growth in interim retail sales alongside a 95-basis point decline in gross margins, giving it an interim pre-tax profit of £14.2m.

“It will be interesting to see if supply chain disruption has made any difference to the outlook in particular, as ASOS looks to get over the teething logistical troubles with new warehouses which dogged last year,” says AJ Bell investment director Russ Mould.

“A major capital investment programme, in terms of IT and warehousing, saw ASOS end last year with a net debt position of £91m. Analysts and shareholders will be looking for improved cash flow and a possible small reduction here. One thing that shareholders do not need to worry about is the dividend. ASOS does not pay one!”

“A major capital investment programme, in terms of IT and warehousing, saw ASOS end last year with a net debt position of £91m. Analysts and shareholders will be looking for improved cash flow and a possible small reduction here” - AJ Bell investment director Russ Mould

Reputational damage

Investors will also be keen to learn more about the financial impact of the coronavirus pandemic. Unlike brick and mortar rivals such as Next [NXT], which has shut down its physical and online store, ASOS is still trading.

But the company has had to manage complications such as warehouse staff publicly airing concerns over their health and ability to safely social distance while they work. These allegations have been refuted by execs at the company, but could lead to reputational damage in the short and long term.

There is also uncertainty over consumer spend and whether demand for clothes such as social attire will remain as amid government guidelines to stay inside. “Fewer people taking holidays as the weather warms up is likely to translate to lower demand for summer and beachwear, let alone general unwillingness to spend on fashion,” wrote Edward Sheldon in The Motley Fool.

“Fewer people taking holidays as the weather warms up is likely to translate to lower demand for summer and beachwear, let alone general unwillingness to spend on fashion” - Edward Sheldon

There have also been concerns around ASOS managing decimated shipping lanes and air freight in its supply chain. Jefferies analysts said a third of ASOS group’s products are sourced from China, but that it can flex its supply operations in other multiple territories to make up for any disruption.

 

A positive outlook

“The long-term story remains attractive here. The company has developed one of the leading online fashion platforms in the world and as online sales continue to grow in the years ahead, ASOS should benefit,” notes Sheldon.

“The potential for international growth also remains vast. In the near term, I expect ASOS shares to be volatile. However, I’m confident that buying now will turn out to be a good move down the track.”

Looking ahead there is hope that ASOS will come out of its past and present challenges in good shape. According to analysts at MarketScreener, the share price is rated hold, with an average target price of 2,914p.

 

Market Cap£1.001bn
PE ratio (TTM)40.65
EPS (TTM)29.40
Quarterly Revenue Growth (YoY)12.70%

ASOS share price vitals, Yahoo Finance, 6 April 2020

 

For the full year to August 2020, elsewhere AJ Bell says analysts are looking for 14% sales growth to £3.1bn. According to the firm, pre-tax profit, which fell to £33m last year, is tipped to rebound to £45m and then to £85m in August 2020 and August 2021 respectively. International growth will be key.

Despite issues with overseas warehouses, the US market offers ASOS strong growth hopes. The company saw a 23% jump in retail sales in the US in its last update.

Takeover talk could also keep investors, shareholders and traders interested. Amazon [AMZN] has been mooted as a buyer in the past, but analysts believe it is now more likely given the low share price that major shareholder Bestseller — the Danish clothing giant — could put ASOS in its basket.

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