Asos: all-weather gear
Why online fashion store must sustain its stellar growth rate
In recent weeks, the £4 camisole top on online fashion store Asos’ site has appeared a better autumn purchase than shares in European retailers. Shares in Germany’s Zalando fell after it blamed a long, hot summer for customers delaying the purchase of their winter coats. Superdry customers also appeared to be suffering in the heat, forcing it to warn on profits.
But, rain or shine, the 20-something fashion lovers that make up the Asos customer base have continued to hit that spend button. Pre-tax profits for the year to August 31 rose 28 per cent to £102m, with sales equally strong at £2.3bn. Its share price jumped 16 per cent. True, growth was at the bottom end of a forecast range of 25 per cent to 30 per cent, but healthier than most of its peers. Better, the shares are trading near their five-year low on its forward price-to-earnings ratio.
Asos plans to stay ahead by investing heavily. About £242m, or 10 per cent of sales, went to capital expenditure in the past year alone. Expect more of this in the year ahead as it continues to invest in warehouses. So far, its profit margins have remained buoyant. Its gross margin was up 130 basis points at 49.9 per cent, though boosted by currency movements. But for this investment to make sense, it needs to sustain its stellar growth rate. The merest hint of slower sales growth knocked shares in July.
Every year that task becomes harder. Asos has gone from 9m active customers and £950m sales in 2014 to more than double that in 2018. How many more fashion-conscious 20-year-olds are out there?
Plenty, it seems, particularly on the Continent, where active customers jumped by a quarter to 7.1m. It still has only 1.6 per cent market share there.
Most apparel retailers can sense a storm front coming. Asos should be an exception. Even with Wednesday’s gains, these shares are 25 per cent down on the year, twice as big a drop as the MSCI Europe Retailing index. This looks harsh given its steady performance.