EUR 850.00 For Business Accounts Only

Morningstar | ASOS Highlights Operational Hurdles and Plans to Address Them, Cuts Capital Expenditures Plans

We are retaining our GBP 3,480 fair value estimate for no-moat ASOS as the company reported first-half 2019 results and kept its full-year outlook. Revenues in the period grew by 14% (12% at local currencies) versus 14.7% at our annual expectations and 15% annual company guidance. Gross margin shrinkage, at 60 basis points, was lower than 150 basis points the company forecasts for the full year and our annual expectations because price investments will be shifted to the second half of the year. The company maintained operating margin guidance of 2% for the full year. In the midterm, management expects sales growth acceleration (although it didn’t reconfirm a commitment to the prior 20%-25% growth target) and a return to 4% margin. We expect 17% average revenue growth from 2020 to 2023 and a return to 4% margin by 2021-22. Over the long term, management believes it can achieve operating margins in the high single digits, which compares to our 6.3% terminal margin assumptions.

There was also a surprise reduction of capex plans for 2020 to GBP 150 million and GBP 150 million-200 million midterm, down from GBP 230 million-250 million midterm announced only at the end of fiscal 2018. Factoring in this reduction would result in a 4% rise in our fair value estimate. We still expect capital expenditures to trend upwards thereafter as the firm needs to build capacity as it grows (currently capacity should support about GBP 4 billion in sales) and cater to customer demands for faster delivery.

Apart from more a competitive and promotional market environment, management highlighted several operational hurdles, such as delivery disruptions in the U.S. following a transition to a local warehouse, that have been addressed by hiring additional local staff) and should not be a headwind in the second half of the year. Performance in Germany and France (contributing about 20% of sales) was hit by reduced marketing spending in the second half of 2018, which now has been restored.

ASOS Design also lagged third-party brands, with 5% growth in the first half versus 18% growth for the third-party brands, and is now contributing 36% to the mix. ASOS Design is addressing issues by focusing on newness (the company is focusing more on the availability of products rather than a broader range), refreshing the presentation with more inspiring styling and reviewing price points.

Inventory grew less than sales in the first half of the year at about 9% versus 14% revenue growth, hence, the inventory position looks healthy. Customer engagement metrics continued on a positive trend with average order frequency, improving to 3.55 from 3.41 a year ago, with the conversion rate improving to 3.2% from 3% a year ago and active customer numbers increasing by 16% to 19.2 million.