It’s been a tough year for Asos [ASC]. On 18 July it issued a surprise profit warning – its third in seven months – due to problems with its international warehouses. The news wiped 23% off its share price on the day, while Barclays [BCS] downgraded its recommendation to “equal weight”, slashing its price target by a third to 2,750p.
Since then the retailer has regained 20.9% to hit 2,500p as of Monday’s close, despite Barclays’ warning that it’s unconvinced the company’s management are capable of taking the business global.
Indeed, recent IT-related problems at its German warehouse and a struggle to keep up with demand in the US emphasise the growing pains the online fast-fashion retailer is facing as it pivots to a truly global operation.
Down almost 70% from its all-time high share price of 7,730p, hit in March 2018, Asos expects to report profits of between £30m and £35m this year according to its second-quarter statement, which is well below the £55m forecast by analysts and the £102m it reported in 2018. As of Wednesday’s open, the stock is up 4.5% in the year-to-date, although year-on-year it is still down a massive 58.8%.
But with a market cap of £2.1bn and a somewhat expensive (TTM) PE ratio of 35.39 compared to the industry average of 24.52, perhaps investors still see some underlying strength in Asos. The retailer did report £919.8m revenue for the quarter ending 30 June, up 12% from the £823.9m it reported the year prior.
Meanwhile, analysts’ average expectation of 4,263p suggests a potential upside of 70.5% based on the current price.
What’s impacting Asos’s share price?
Asos’s venture into the US has so far failed to deliver on both the retailer’s and analysts’ expectations alike. While the Gen Z and millennial e-commerce space in the US and Europe are open for new market entrants, Asos has just 0.5 and 1.6% market share respectively, as it competes with upstart e-commerce brands such as Boohoo [BOO] and PrettyLittleThing.
When Asos’s first US distribution centre in Atlanta began operations in February, it was understaffed and failed to meet customer demand, coming to a standstill as the clothing brands it stocks struggled to get products into the country fast enough for shipping.
This led to Asos admitting it was unable to cope with customer demand during Q2, demand that “far exceeded” expectations.
In its July profit warning, the retailer described problems in its Atlanta and Berlin warehouses, and not for the first time. In 2017, £6.2m worth of clothing was damaged at its Berlin warehouse due to a fire, which restricted product availability – affecting sales and leading costs to rise. The Berlin warehouse was also affected by an IT glitch, caused by transferring orders to a new automated processing system.
“The major overhaul of our infrastructure has been bumpier and taken a lot longer than we originally anticipated,” Asos CEO Nick Beighton said to analysts. “We acknowledge that this is a failure in execution.”
“The major overhaul of our infrastructure has been bumpier and taken a lot longer than we originally anticipated. We acknowledge that this is a failure in execution” - Asos CEO Nick Beighton
While the retailer saw “robust” year-on-year sales growth of 16% in the six months to 28 February in the UK, the "operational challenges" at its Atlanta and Berlin warehouses had knock-on effects in the US and Europe at large, where sales growth lagged by 12% and 5% respectively.
However, in spite of the warehouse-related hiccups, it appears US sales have not necessarily hit the heights initial demand suggested they would, with the retailer cutting product prices and offering promotional deals at a rate unseen in its other territories, in an attempt to entice shoppers and re-energise sales.
Analysts at investment bank UBS noted: “The US is the market with highest promotions and yet inventory age has increased substantially.
“The US was also the market with the lowest newness [new products] during these months. This could mean the product isn’t selling as well as planned and the US is overstocked – a sign of more future markdown/gross margin pressure.”
Data by UBS suggests that in the US, net promotions are up nearly 10% year-on-year, while retail prices in the region are down by 9% – considerably higher than the 6% drop the retailer has seen as a whole.
|PE ratio (TTM)||33.57|
|Quarterly Earnings Growth (YoY)||-87.80%|
Asos share price vitals, Yahoo Finance, 7 August 2019
Still, despite these issues, and the fact that Asos’s share price has dropped 11.4% since it reported results on 17 July, it maintains a majority “hold” rating among analysts.
When Barclays dropped its price target on Asos, it also noted that: “We are still of the view that there is a big opportunity in the US. If inventory issues are fixed, consumer demand is there.”
Sofie Willmott, an analyst at research firm GlobalData, also had positive things to say regarding the firm’s outlook, suggesting the future of the fast-fashion retailer “remains bright” as "changes being made to US and EU distribution centres are vital to facilitate long-term growth in these key markets. The retailer's agility and willingness to change to remain relevant to its customer base will help it to continue gaining market share, both at home and abroad.''
“The retailer's agility and willingness to change to remain relevant to its customer base will help it to continue gaining market share, both at home and abroad” - GlobalData analyst Sofie Willmott
Slimming margins and management questions
Question marks, however, remain over Asos leadership’s ability to steady the ship. “Management could still conceivably deliver on the promise of a return to a 4% margin, with growth accelerating to 20% in FY20/21/22,” Barclays said in a client note in July. “We are still inclined to see this as an achievable scenario – but we lack confidence.”
Wayne Brown, an analyst at stockbroker Liberum said: “The operational issues in Europe and the US signal to us a lack of enough senior leaders in the business with the adequate skillset to undertake the complex capital projects.”
Brown added that £700m had been invested into Asos’s warehouses over the previous four years and that, although sales had doubled, the company’s profits were diminishing. “We question where £1.5bn of additional sales have gone considering profits are now £20m lower than in 2015.”
Russ Mould, investment director at AJ Bell, said: "Fashion fans have plenty of places from which to buy clothes, and so Asos is at risk of losing out to the competition if it cannot fix its problems fast.
“Fashion fans have plenty of places from which to buy clothes, and so Asos is at risk of losing out to the competition if it cannot fix its problems fast” - Investment director at AJ Bell, Russ Mould
"We live in an impatient world where so many people want something in an instant. If Asos doesn't have the stock ready to ship then consumers will simply go elsewhere."
The consensus among analysts is that the retailer will ultimately sort out its logistics problems in time, although it remains to be seen whether it can avoid further missteps before its full-year results on 16 October.
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