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Analysts remain bullish on ASOS despite third quarter sales miss

"The main challenge for ASOS is keeping a lid on the spending needed to support further sales growth,” said George Salmon, equity analyst at Hargreaves Lansdown
ASOS
Investors had high hopes for ASOS today

ASOS PLC (LON:ASC) shares fell more than 10% on Thursday after third quarter revenue missed market forecasts but many analysts remain positive on the online fashion retailer.

The company posted revenue of £823.9mln in the fourth months to June 30, a 21% increase at constant currencies, trailing analysts’ estimates for a 25.3% rise.

READ: ASOS shares tank as third quarter sales miss market forecasts

Shares also reacted negatively to the firm saying it expects full year sales growth to be at the lower end of its guidance range.

However, a number of analysts continued to recommend the stock to investors after the trading statement.

Numis and Liberum maintain 'buy' ratings

Numis left its rating on the stock at ‘buy’ with a target price of 8,500p, saying it still believes the company’s “outstanding customer proposition and significant investments are supporting and driving a vast long-term profitable growth opportunity”.

Liberum also maintained a ‘buy’ rating and has its target price at 8,000p. It said it was encouraged by the company’s remarks that trading in the fourth quarter has started well, particularly full price sales.

The broker added: “We see any further pressure on the share price (down c.10% since mid-March) as a good buying opportunity.”

Online winning the bricks versus clicks battle

George Salmon, equity analyst at Hargreaves Lansdown, said he thinks the future remains bright despite the third quarter miss.

“Online is winning the bricks versus clicks battle, and ASOS has a strong presence in several international markets. That should provide the fuel for sustained growth for years to come,” he said.

Bricks and mortar retailers have been struggling as more consumers shun the high street to shop online. As a pure-play retailer, this trend has worked in ASOS’ favour.

ASOS spending plans 'may raise questions'

The group has been investing more in its infrastructure to cope with rising demand and support its international expansion.

“The main challenge for ASOS is keeping a lid on the spending needed to support further sales growth,” Salmon said.

“If it can deliver an efficient roll-out, that would pave the way for margins to rise beyond the 4% the group has churned out up to now.”

READ: How ASOS became the ‘King of AIM’

AJ Bell investment director, Russ Mould, said most retailers would be “thrilled” with the third quarter revenue growth and sales guidance ASOS unveiled, given the challenges facing the retail sector, including weak consumer confidence and higher cost inflation.

“Yet ASOS shares are being hammered because the stock trades on nearly 60 times forward earnings and investors are looking for upward momentum in earnings forecasts, not unchanged ones, to help justify such a premium rating,” he said.

“This does not mean ASOS has suddenly become a bad or disappointing company – although the spring upgrade to the next three years’ capital investment plans may raise questions in some investors’ minds about how much cash is required to continue to scale up the business.”

“It may therefore be hard for investors to find ‘value,’ from a strictly share price perspective, among the retailers who are succeeding, even in these straitened times."

In early afternoon trading, shares were changing hands at 5,782p. 

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Article
October 17 2018

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