Record-breaking ASOS worth more?

Against the well-versed industry pressures affecting all clothing retailers this past year, ASOS hasn't done too badly. Margins are still recovering after a couple of years of heavy investment, but warehouse and technology improvements are on-track and self-help measures should improve profits. Despite its high valuation, the shares are still a favourite in the City.

Underpinned by both UK and international growth, retail sales rose a better-than-expected 22% to £447 million, or 29% at constant currency, in the four months to 31 December. Active customers shopping on its website jumped 18% to 10.7 million. International sales still made the largest contribution to revenue, although this slipped 1 percentage point to 54% this year. Revenue made new records over November's Cyber Weekend, with improvements in average order frequency, basket value and number of orders.

Heavy investment in warehouse and technology systems have hit short-term margin, which fell 40 basis points in the four months. Construction of its EuroHub 2 facility started in December and is going to plan. Money has also been spent on price cuts, although this is crucial as most of ASOS's target market, "20-somethings", prioritise cost. At least ASOS has shortened the length of promotions to drive higher sales of full-price clothes.

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But Numis analyst Andrew Wade is impressed: "This was an exceptional performance, particularly given the continuation of the shift in stance towards full price, the unfavourable weather, and net currency headwinds."

He reckons the online retailer will have boosted sales by 20% to £1.38 billion in the year to August 2016, and pre-tax profit by a similar figure to £57 million, giving earnings per share (EPS) of 53.9p. Wade looks for EPS of 75.5p in 2017.

"We continue to believe that ASOS has a stand-out proposition, combining a sharp demographic focus, a credible fashion brand, an extensive range of top third-party brands, genuine fast fashion own-label product, content, and a leading delivery proposition.

"We can find no other retailer that has the same credentials as ASOS to become a global fashion destination and, with this in mind, we are confident that the business can drive sustainable long term global growth and retain our 'buy' stance."

After an initial 7% slide, ASOS shares have recovered a chunk of lost ground, trading down 2% mid-afternoon Thursday. It puts the shares on over 50 times forward earnings - enough to make your eyes water, but a modest multiple compared with the price investors have been willing to pay in recent times.

The shares are worth 4,250p, according to Wade.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.