Online Retail – Analysing penetration rates and growth trajectory
* Online retail growth to outperform but at slower pace
Growth in online retail penetration has exceeded expectations over the past five years,
on the back of increased mobile e-commerce, broader ranges and more shopper-friendly
websites. While the channel shift will continue, we expect growth to slow, especially in
more developed markets, such as the UK, where adult online shopping penetration rates
have risen to 75% from 60% in 2009.
Our analysis of the UK and US shows that online apparel retail growth rates remain
robust (>10%) until penetration rates reach over 25%. As online penetration rates rise
towards 35%, growth rates tend to slow to 5-10% pa. In the UK, further growth in
apparel online retail sales will likely be driven less by penetration and more by average
spend per head. As well as macroeconomic conditions, this depends on consumers
shopping more online as they gain confidence in this channel and as free and/or
convenient delivery methods encourage them to make more regular purchases.
--> In the UK, we still like Next (raising PO to 8650p) as we believe the market underappreciates its online business (both UK and increasingly International). We also maintain our Buy rating on Sports Direct given its strong market position and accelerating online business on the back of click & collect. H&M remains our contrarian
large-cap Buy; we see its online business helping to drive international expansion and its long-term store roll-out potential. Our PO on SuperGroup is raised to 1600p (1450p) on continued recovery prospects. In a separate note, we upgrade Asos to Buy (PO 4300p) post the recent 25% de-rating. Of the pure-play online retailers, In our view, Asos has significant growth opportunities which should enable it to grow its revenue to £5bn by 2024E, a 10-year CAGR of 20%. In addition, we see scope for the operating margin to improve given the high operating cost base.