Earnings

Will ASOS’s share price surge higher after bumper earnings?

ASOS’s [ASC] share price is riding high due to the increased demand for online shopping. Customers stuck at home and wary of returning to the high street turned to virtual stores and saw the online retailer deliver a strong trading update for the first part of 2020. International sales were up and, perhaps unsurprisingly, loungewear was a primary contributor to the surge in revenue.

But with ASOS’s share price back at pre-pandemic levels, is there any more upside on the stock? 

 

 

What's happening with ASOS's share price?

ASOS’s share price jumped 4% after delivering its mid-year trading update last Wednesday 15 July. While the stock experienced some volatility, it managed to close the week at 3448p, 3% higher than where it had started.

Unsurprisingly, the stock saw a steep sell-off mid-March as the coronavirus outbreak took hold. However, this sell-off was relatively short-lived, with ASOS's share price clawing back the losses by mid-March.

Overall, ASOS’s share price is up around 3% so far this year, reflecting the appetite for online shopping, but is still around 9% off its 52-week high. Have the results done enough to see it surpass this level in the coming months?

 

What happened to ASOS’s share price following the results?

ASOS saw just over £1 billion in retail sales for the four months up to 30 June. That's a 10% increase from the £919 million seen over this period last year. 

Item sales increased 15%, favouring what ASOS termed the 'lockdown product mix' — mostly loungewear, with limited demand for occasion wear.

ASOS saw bumper growth in EU retail sales, which came in at £328 million, up 22% compared to last year. An easing of lockdown measures played a big role in the strong EU numbers.

Encouragingly, ASOS saw its active customer base increase 16% year-on-year to 23 million, with substantial growth in international user numbers. Overall, international retail sales were up 17%, more than offsetting the 1% dip in UK sales.

23million

ASOS's active customer base - a 16% YoY rise

  

Other growth drivers were greater warehouse capacity, higher demand and an improved returns policy. As lockdown continues to ease, ASOS’s share price could gain as customers start to buy clothes beyond loungewear.

 

What are the headwinds for ASOS’s share price?

ASOS has said that it remains cautious in the short-to-medium term, citing concerns over continued social distancing, restrictions around events and "an uncertain economic outlook for our 20-something customers."

"We have learnt a lot and adapted quickly, and ASOS finishes the period with improved underlying profitability. While we remain cautious about the consumer impact of Covid-19 looking forward, we are on track to deliver strong year-on-year profit growth and to return to positive free cash flow for the full-year,” said ASOS CEO Nick Beighton.

“We have learnt a lot and adapted quickly, and ASOS finishes the period with improved underlying profitability. While we remain cautious about the consumer impact of Covid-19 looking forward, we are on track to deliver strong year-on-year profit growth and to return to positive free cash flow for the full-year” - ASOS CEO Nick Beighton

 

A graver concern relates to the working conditions of employees in ASOS's factories. In March, ASOS's share price understandably came under pressure from the GMB union due to allegedly insufficient adherence to social distancing recommendations in the company’s Barnsley warehouse.

In the results, Beighton addressed these concerns by saying workflows and warehouse capacity have been improved to help workers operate safely. Understandably, given the impact a similar issue has had on Boohoo's [BOO] share price, this is an area of concern for shareholders.

Beighton said what was happening at Boohoo had “potential read-across from consumers” in his statement. That said, if ASOS can show that it has improved its sustainability credentials, this could represent an opportunity as customers abandon the fashion retailer’s rival.

 

What do the analysts think?

Of the analysts tracking ASOS’s share price on the Financial Times, the stock carries a 4000p target. Hitting this would see a 16% upside based on Monday’s close. The consensus among analysts on the Financial Times seems mixed. While the majority rate it a Buy or Outperform, two also rate the stock a Sell.

 

Market Cap£3.488bn
PE ratio (TTM)65.59
EPS (TTM)53.30
Quarterly Revenue Growth (YoY)21.5%

ASOS share price vitals, Yahoo Finance, 21 July 2020

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