ASOS smashes expectations, and Just Eat Takeaway focused on market share over margins

“The FTSE 100 managed to stem the losses of the last two days on Wednesday morning, though it failed to make any tangible progress either, sitting just a handful of points higher early on,” says AJ Bell Investment Director Russ Mould.

“Energy stocks did a lot of the heavy lifting after oil prices hit 11-month highs on continued reductions in output and on hopes that strong Chinese economic data bodes well on the demand side.

“A lot of attention is centred on the US where, with the inauguration of President-elect Joe Biden just a week away, a second impeachment of incumbent Donald Trump is in the works after the events at the Capitol building last week.

“So far the markets have been remarkably relaxed about the political turmoil across the pond but that could change if there is any escalation in tensions. Investors will be relieved when the torturous transfer of power is finally completed.

“The start of the US fourth quarter earnings season which kicks off in earnest in the coming days will also give an insight into how the corporate world is faring amid an ongoing spike in Covid-19 infections.”

ASOS

“By rights, ASOS shouldn’t be doing as well as it is. Its target market has nowhere to go at night to socialise with friends, so no need to buy new clothes to show off their latest style.

“This same group is also highly vulnerable to unemployment, given how its target demographic represent a large part of the workforce in sectors affected by lockdown restrictions, namely retail and hospitality.

“Therefore, the fact that ASOS keeps smashing expectations is a credit to the company’s marketing skills and service standards.

“You have to think why demand for its clothes remains so strong. One could suggest that people are bored at home and ordering goods gives them something to look forward to. We’ve become a nation of curtain twitchers eagerly awaiting the next delivery van or the postman.

“ASOS customers may also like to wear new clothes to keep their social media feeds fresh with new images.

“Lower returns rates will have helped the company’s profits, reviving a trend seen in the first half of 2020 where consumers happily ordered goods but were less enthusiastic about queuing up in the Post Office to send unwanted items back. At some point this trend will reverse, but for now ASOS is enjoying the fact its returns department is less busy.

“It’s not all smiles in its trading. Margins have slipped due to the type of products being sold during lockdown, having to spend more money on market to attract customers, and the dreaded increase in delivery costs. It’s also got £15 million worth of Brexit tariff costs to stomach.”

Just Eat Takeaway

“We may all be sat at home, unable to eat out in restaurants and pubs, and craving the occasional treat of ordering food in, but Just Eat Takeaway has not just sat on its laurels and allowed the catalyst created by the pandemic to do its work.

“In the UK, it has carried out a full revamp of its marketing strategy, significantly expanded its sales team and added new restaurants and chains including McDonald’s to the platform.

“This will bring Just Eat into line with how the other part of the business, Takeaway.com, approaches things in Germany and the Netherlands.

“The reason there is no room for complacency is the level of competition, with the likes of Deliveroo and Uber Eats also vying to attract our takeaway spend.

“A big increase in the number of couriers employed directly by the company will bring with it increased costs, taking Just Eat further away from its original capital light model where it just provided an online platform for restaurants.

“The investment in ramping up delivery capability is reflected in the margin pressure revealed by today’s trading update. There is a firm signal that management will prioritise market share over profitability for the time being at least.

“Having three big players in this market makes it very difficult to turn a consistent profit. As a consumer it makes little difference to you if your food is brought to the door by Just Eat, Deliveroo or Uber Eats.

“This means operators are forced to spend lots of cash on marketing and to use incentives like vouchers to try and mark themselves out and secure some level of customer loyalty. Further consolidation in this sector seems a real possibility.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.


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