Archived article
Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
magazineAct now to take advantage of a superb buying opportunity in ASOS shares
A share price plunge from £65 to £59 at global online fashion destination ASOS (ASC:AIM) since a poorly-received third quarter trading statement (12 Jul) presents a compelling new entry point.
We rate this as a superb business and highlight that spending money on infrastructure improvements is the right thing to do to support future growth, even if it means a drag on earnings short-term.
WHY DID THE SHARES FALL?
A highly-rated stock with elevated growth expectations baked-in, ASOS’ total group revenue growth of 21% to £823.9m for the four months to 30 June came in below the 25.8% called for by analyst consensus forecasts.
Furthermore, the pure-play online fashion seller focused on 20-somethings warned full year sales growth will likely be ‘towards the lower end’ of its previously guided 25%-to-30% range, with ASOS embedding new infrastructure and flagging a temporary demand impact from its actions around new data regulation.
Nevertheless, ASOS remains on track to deliver in-line full year pre-tax profit, upgraded full year gross margin guidance and it left current year capital expenditure guidance intact at £230-£250m.
Chief executive Nick Beighton also insisted fourth quarter trading had started well and remains confident of delivering yet another year of strong growth.
WHY IS IT SPENDING SO MUCH MONEY?
Back in April ASOS said spending would need to rise materially on logistics and distribution to support its rapid and internationally-derived growth. The ambitious retailer has just appointed former ITV (ITV) head honcho Adam Crozier as chairman as it looks to go to the next level.
Despite the recent disappointment, ASOS remains a structural winner with fantastic growth momentum at its heels. In the period, retail sales were up more than 20% in the UK, EU and US, while Rest of the World revenue was 11% ahead.
Excitingly, the number of active customers, defined as having shopped in the last year, was up 20% year-on-year at 18m.
Numis Securities believes ASOS’ ‘outstanding’ customer proposition and significant investments are supporting and driving a vast long-term profitable growth opportunity.
Liberum Capital believes the drop in the share price is an overreaction, arguing ‘confidence should be taken from the acceleration into July and the benefit from greater gross margin expansion than was previously guided.’
Likely to face a small headwind due to US online sales tax changes, the broker views ASOS as ‘a structural winner, benefiting from scale and first mover advantage as it entrenches its position through a centralised distribution network alongside a best-in-class product offer and engagement strategy.’ (JC)
Important information:
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
