ASOS’s increased spending plans are not a reason to dump the shares

Plans to boost spending on warehouses, automation and technology haven’t gone down well

Online fashion retailer ASOS (ASC:AIM) says its spending needs to rise materially on logistics and distribution to support its rapid and globally-derived growth.

While that hasn’t gone down well with investors, we do see positives longer-term in having more robust infrastructure to cope with expected demand.

The online business is unencumbered by the same level of overheads as a bricks-and-mortar shopkeeper, yet still has to spend big to support its stellar growth.

This is providing some fodder for investors who dislike the stock and argue the toppy valuation is hard to justify; even after a reverse to £61.22 per share, the AIM giant still swaps hands for over 60 times this year’s forecast earnings.

In contrast, fans of the company argue ASOS represents a compelling play on the clothing market’s channel shift to the internet and as chief executive Nick Beighton reminds investors, ‘ASOS’s market shares remain relatively modest around the world, offering significant opportunities for continuing growth in the years to come.’

Half year results to 28 February revealed a 26% surge in retail sales to over £1.13bn amid strong UK and overseas growth, and a 10% hike in pre-tax profit to £29.9m.

Encouragingly, the £5.27bn cap’s retail gross margin rose by 100 basis points to 48% and ASOS received more than a billion site visits during the first half for the first time, although growth did slow in the US and Rest of World regions.

Full year and medium term sales and earnings guidance were unchanged, but ASOS cautioned that total capital expenditure will increase to between £230m-to-£250m in the financial year to August, up from the previously guided £220m.

This level of infrastructure and technology-related spending is set to continue for the next two financial years.

Ambitious ASOS is laying the foundations for £4bn of sales over the medium term, although the upgraded spending guidance means the retailer expects to be free cash flow negative this year and next, returning to free cash flow positive in the year to August 2020.

Stockbroker Numis Securities forecasts 26% rise in pre-tax profit for 2018 to £100.6m, ahead of a 20% rise to £120.6m next year.

Based on this year’s forecast 26% growth in earnings per share to 97.9p, rising to 117p next year, ASOS’s growth potential is reflected in a forward multiple of 63.3 times and a punchy PEG ratio of roughly 2.4 times.

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