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Morningstar | ASOS Well Positioned to Benefit From Structural Shift to Online Fashion Buying

ASOS is a leading European e-commerce player in fashion and cosmetics focusing on the 20-something-year-old demographic segment. It offers more than 85,000 products on its website from its own label and around 1,000 third-party brand partners. We believe that through its wide reach (over 18 million active users globally with around 9% of population reach in its home U.K. market), ASOS benefits from traces of network, cost, and intangible asset advantages. Although we don’t believe those advantages are strong enough to warrant a moat currently, we expect the network effect and intangible asset advantages to strengthen over time as more customer traffic data is accumulated and better analytics allow improve conversion rates and customer loyalty; thus we grant ASOS a positive moat trend rating. We believe ASOS is well positioned to benefit from increasing online penetration of fashion and cosmetics sales in its markets of presence as well as to expand share especially in its newer markets such as continental Europe and the United States. We expect growth rates in its home market to slow, given the already high online penetration among the target audience of 20-somethings, high ASOS market share (we estimate it to be 16.5%), and flat growth in this demographic cluster over the next 10 years. Although savings from increasing scale are likely to be reinvested in the customer value proposition (pricing and free and fast delivery), we believe ASOS’ profitability should benefit from positive leverage on administrative and warehousing costs. All in, we expect ASOS’ sales to grow by 15% over the coming 10 years with operating margin improving to 6.3% in 2028 from 4.2% in 2018 and 2.2% in 2019.