ASOS booming, but shares slump

ASOS scorched a three-year high Monday, hitting 6,147p ahead of these interim results. Said results were overall pretty impressive, but a few perceived negatives meant shares in the internet fashion giant slumped as much as 7% Tuesday.

While many UK high street retailers like Next are seeing numbers fall as inflation picks up and constrains consumers' purse strings, AIM's largest company is thriving. Group revenue shot up 37% to £911.5 million in the half-year to 28 February, and retail sales increased by a similar amount to £889 million. Pre-tax profit was also up, by 14% to £27.3 million.

Chief executive Nick Beighton hailed "a strong set of results showing great progress across the business", adding that "ASOS is making good progress towards its ultimate goal of becoming the world's No.1 destination for fashion-loving 20-somethings."

The figures were boosted by huge growth at the international business where both revenue and retail sales surged by 54%. In the UK, those numbers were up a more modest 17% and 18% respectively.

George Mensah, an analyst at Shore Capital, points out ASOS's business model enables it to receive a "double benefit" from sterling weakness: "Higher reported growth in international markets and the ability to reinvest in price and proposition enhancements, which in turn remove barriers to purchase and stimulate greater demand."

However, gross profit margin in the first-half was down 60 basis points year-on-year due to price cuts in the EU and US as well as investment into its UK loyalty scheme. This was in-line with management's expectations, but brokers had pencilled a much smaller decline, with RBC expecting only a 10 basis-point dip

Further, guidance for full-year pre-tax profit was kept in line with market consensus at £72-84.5 million. Barclays' Andrew Ross notes this was probably "due to Eurohub 2 transition costs, sourcing inflation (both FX + ethical focus we believe), absorption of change in Australian sales tax, plus national minimum wage"

There was also no update on ASOS's planned new US warehouse, though the firm says it should decide on a location "very shortly" and a site will be "quickly identified thereafter".

Overall, though, RBC's Richard Chamberlain sees ASOS's top-line performance as "very strong, particularly when compared with Next's recent online growth and outlook comments". He also reckons guidance for full-year revenue growth of 20-25% is "conservative on account of recent and upcoming proposition enhancements".

"The expansion into sportswear, focus on mobile and new brand additions should support growth throughout FY17," he added, sticking a target price of £60 on the stock, below yesterday's highs, but cautioned: "Once again it shows how difficult it is to achieve both sales and margin higher than consensus expectations."

ASOS shares traded as low as 5,536p early Tuesday, although investors tempted to nibble at their cheapest in three weeks had them back near £58 at lunchtime.

And analysts were unanimously bullish. Simon Bowler at Exane BNP Paribas thinks revenue acceleration and management confidence in the outlook is the more important aspect of this statement.

Consequently, he keeps his 'buy' recommendation and target price of £75, well above its all-time high of 7,195p struck in February 2014, implying potential upside of over 30%.

If he's right, it would herald the continuation of a remarkable recovery for one of the darlings of AIM – the aforementioned all-time high was a pre-cursor to a woeful 2014 for ASOS as the firm lost three-quarters of its value, eventually bottoming out at 1,742p in October that year.

Our resident stockpicker Edmond Jackson pointed out that then chief operating officer Beighton's decision to part with half a million quid buying shares at a slightly higher level of 2,249.6p "must imply a longer-term rationale". It's not been plain sailing, but on those shares, Beighton is sitting on a tidy profit.

Clearly, owning shares in a stock trading on a forward earnings multiple of around 76 times, dropping to a still-eye-watering 57 times in 2018, can be nerve-racking, and that's what's happened today.

ASOS has got to keep doing the numbers to justify investor faith and keep that multiple in the stratosphere. Slip-ups get punished, and Exane expects consensus estimates for pre-tax profit this year to drop by 2-3% to £78-79 million, giving earnings per share of 75-76p.

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.