ASOS PLC (LON:ASC) reported continued strong sales growth but said profit margins were being squeezed by global supply chain disruption and rising freight costs.
As well as a strong performance in the UK, where sales were up 60%, the online fashion retailer hailed an improvement in US growth rates to 31% for the four months to end-June on a constant currency basis or 16% if the swings in the pound are ignored.
The progress Stateside, where a partnership with US department store group Nordstrom was recently agreed for the Topshop and Miss Selfridge brands, was due to an improved range of stock plus increased demand for clothing for going out and social occasions following the easing of some Coronavirus (COVID-19) restrictions and the impact of government stimulus cheques.
Growth in its home market slowed in the final weeks of June, ASOS said, putting the blame on “continuing COVID uncertainty and unseasonal weather”. However, the previous months indicated that consumers were continuing to buy clothing online even with most restrictions removed, helped by increased promotional activity.
Revenue for the group's third quarter totalled £1.29bn, up 31% year on year or 5% on an underlying basis adjusted to reflect the underlying sales performance for prior year returns provision phasing.
The fourth quarter of its financial year is expected to be broadly in line with the prior year and supply chain pressures are set to continue, pushing up freight costs,. AIM's largest company said full-year adjusted pre-tax profit is expected to remain in line with forecasts.
Shares fell 8% in early trade to 4342p.
Analyst Dan Lane at Freetrade said: “The UK might still be the jewel in the sales crown at ASOS but properly cracking the US could unlock a huge growth opportunity.
“Today’s update shows the initial teething problems of entering the market were worth it. US consumers are steadily coming round to ASOS but competition is fierce in the likes of Revolve. ASOS needs to build its brand presence over the water fast.
“With margins down on increased freight costs and supply chain disruption, the group really needs to increase sales volumes and the opportunity set doesn’t come much bigger than the US market.”
He added: “The group owes its shareholders some clear evidence of a solid return on the money pumped into Topshop. The sooner it can do it the better. And if the US sales trajectory starts to get close to the UK figures, ASOS could seriously boom. It’s easier said than done but lockdown shopping momentum and the prospect of unrestricted socialising returning are huge tailwinds.
“Once the dust settles, the retail sector will take stock of the full effect of the pandemic and there will still be a lot of healing to do. If ASOS can emerge from the retail wreckage as a clear leader it could compound that lead as others struggle to shore up the balance sheet and manage debt.
“Most corners of retail might be crossing their fingers for a high street stampede but realistically, buying clothes online was here before the lockdowns and it’ll stay here for a long time after. We aren’t going back.”