As analysts had expected, ASOS plc (LON:ASC) posted some more punchy numbers in its interim results this morning, although an upgrade to full-year sales growth guidance was a pleasant surprise for investors.
Profit before tax for the six months ended 28 February 2017 came in slightly ahead of expectations at £27.3mln, a year-on-year increase of 14% (H1 2016: £23.9mln).
The consensus among City analysts was for a pre-tax profit of £27.1mln.
As it flagged back in its January trading update, revenues were up 37% to £912mln.
Much of that growth came from international retail sales which were up 54% compared to the first half of 2016 at £548mln.
That figure vindicates the group’s decision to expand its international business, particularly as the UK clothing market comes under pressure from rising inflation following last year’s Brexit vote.
As you’d expect then, sales in its home UK market were less spectacular although they still increased to £341mln, a rise of 18% compared to the same period last year.
“These are a strong set of results, showing great progress across the business. International growth of 54% has been excellent and with the Rest of the World segment a stand out performer,” said chief executive Nick Beighton.
“Given the current momentum we are seeing, ASOS is making good progress towards its ultimate goal of becoming the world’s no. 1 destination for fashion-loving 20-somethings.”
While the strong trading will no doubt please investors, the upgrade to full-year top line growth guidance is a bonus.
ASOS said it now expects sales to grow between 30-35% this year, up from the 25-30% it had previously forecast.
Medium term reported sales growth guidance remains unchanged at a still impressive 20-25% per annum.
The upgrade to sales growth isn’t expected to translate to the bottom line this year though, with full-year profit before tax forecast to be in line with market consensus which is currently around £1.87bn.
The reason for the top line not trickling down to the bottom line is because retail margins dipped 40 base points to 47% (H1 2016: 47.4%) as part of the group’s plan to invest further into its international price.
In terms of customer numbers, ASOS said that figure increased by 29% in the first half to take “active customers” to over 14mln.
Capital expenditure guidance for this year was upped back in January’s update to between £150mln and £170mln, figures it repeated again today.
As it previously stated, that cash will be used to fund upgrades to its Barnsley site, a new warehouse in the US and a second European distribution centre.
The first two remain on track, while the Eurohub 2 went live at the end of last month, the Camden-headquartered firm added.
If Asos decides it wants to invest in other areas of its business, it’s got plenty of spare money to do so. At the end of the period, the retailer had £154mln in the bank.
ASOS in fashion with the brokers
Given that ASOS beat most of the City’s expectations, it was no surprise to see a few bullish notes from analysts this morning.
Shore Capital’s George Mensah – who has the stock as a ‘buy’ – said he was likely to “nudge up [his] expectations” for the second half of the year given the slight outperformance in the first six months.
“Our investment thesis on ASOS remains unchanged, we believe this is a business well positioned to take market share in apparel online, which as an addressable market should continue to grow over the long-term as more consumers transact online,” wrote Mensah in a note to clients.
Similarly, Liberum’s Tom Gadsby repeated his ‘buy’ rating and was particularly impressed by ASOS’s commitment to investing in the future of the business.
“ASOS provides a huge range of brands across its website with continued newness but also a strong own label with clear and growing appeal across its key markets. To support this the company is well ahead of the curve in terms of investment to sustain future growth,” said Gadsby.
The 'King of AIM'
"ASOS’s market cap now exceeds that of several FTSE 100 companies," said Hargreaves Lansdown equity analyst George Salmon.
"However, with plenty of untapped potential across Europe and the US, the king of the AIM market has plenty of gas left in the tank, and looks set to continue its impressive record of double digit sales growth for years to come.
"The task now is to navigate through the process of building out its distribution networks in the US and Europe. Building the infrastructure to keep pace with its rapid growth has proven difficult in the past. But let’s face it, this is one of the nicer problems to have.”
Unlike a lot of UK firms listed on the junior market, Brexit has actually helped ASOS.
The weaker pound has almost forced its hand in terms of accelerating its overseas expansion which, as is evident in the sales growth abroad over the past six months, has paid off handsomely.
Weak sterling makes ASOS’s products seem more appealing – at least on a pricing level – to foreign customers, which account for the better part of 60% of total sales.
“The weaker pound has given us the opportunity to grow our business which is predominantly export much harder than we anticipated before 23 June last year,” said Beighton in a conference call this morning.
Even if sterling picks up in the near future, Beighton is glad ASOS embarked on its accelerated expansion plan and believes it will be a better company as a result.
“As and when sterling does strengthen we will be a bigger and better business with more customers, better propositions and better internal capabilities,” the boss added.
“So whenever things [currency movements] do normalise we’ll be a much more resilient business to cope with whatever comes our way.”
Inflationary pressures in the UK
While the company is reaping the rewards from its international customer base, its UK customers are being hit by a toxic mix of falling real wage growth and increasing inflation.
Beighton has made it clear the company ywill do its best to keep prices attractive for its home market customers even though it is expecting inflation to increase import costs.
“I’m expecting greater pressure on our import costs over the rest of this year, [but] we will do everything within our grasp to hold our pricing for the UK customer.”
Share price down though
The online retailer’s valuation has climbed 10% over the past few weeks in the run-up to today’s announcement, similar to what the Fevertree share price did only a few weeks ago.
ASOS shares recently hit levels not seen for three years and they’ve been on a sharp upturn since the middle of 2014.
The stock was trading at a price-earnings ratio of 85 this morning which is a fairly toppy figure pricing in a lot of future growth. Based on last night’s closing price, that number was closer to 100 as well.
Given all that, it seems investors are looking to take some profit, which in some cases will be pretty substantial given the share price has almost doubled in little over a year.
Shares were down almost 7% in early deals although they’ve since recovered slightly and are off 3.5% to £57.67.
--Upgrades for broker comments, additional info, CEO comment and share price--