Online fashion retailer Asos suffers growing pains as costs rise

March 18, 2014 6:58 pm
Asos suffers growing pains as costs rise
By Duncan Robinson
On Thursday night, Asos chief executive Nick Robertson stood in front of the retail world’s glitterati and accepted a gong for retail leader of the year at a black-tie do in a swanky hotel on Park Lane.

Five days later, on Tuesday morning, Mr Robertson sat on conference calls with analysts and investors demanding to know why growth at Asos was slowing, margins declining and expansion costs increasing.
Shares in the fast fashion group slumped as much as 20 per cent, after the London-based retailer revealed that growth in the UK had slowed dramatically in the last eight weeks and that losses from its Chinese venture were £3m higher than expected.
The share price shock brought Asos’s remarkable run of good form to an end. Asos shares have quadrupled since 2012 – more than doubling in 2013 alone. It might also explain why Mr Robertson may have believed this entitled him to some slack from the City.
Yet the share price rally has left Asos trading at more than 100 times its earnings even after Tuesday’s drop. At that valuation, there is no slack to give – especially when recent share price gains have not been backed up by earnings upgrades.
“Asos shares have gone from £50 [in October] to £70 [at the end of February] on vapour,” says John Stevenson, an analyst at Peel Hunt.
The 14-year-old fast fashion group is expanding – total revenues for the eight weeks to February 28 were up 26 per cent to £139.2m. But like any adolescent, it is suffering growing pains.
Losses at its Chinese website, which it launched last year, will be £8m for the year as the group finds it harder than it had hoped to get stock into the country. It had wanted to have 5,000 lines in the country, but instead has 3,000, which has hit sales.
Closer to home, Asos’s main distribution centre in Barnsley is being heavily rejigged to cope with bigger demand, which Mr Robertson says will result in quicker, cheaper and more automated distribution in the long term – with pickers able to get through 250 items every hour, rather than the current rate of 70.
Short term, it equates to expense: capital expenditure at Asos is expected to jump to almost £70m from the £55m previously guided.
The growth of the business has been phenomenal
– Sanjay Vidyarthi, Liberum
While Asos’s colourful headquarters in Camden may be stuffed with a mixture of models and computer geeks, the future of the company depends on something a lot less sexy: logistics. Whether Asos thrives or falls depends a lot on how quickly blokes in Barnsley can get dresses packed up and sent off.
“We will always invest in future potential,” says Mr Robertson, adding that Asos plans to open its distribution centre in Germany later this year and expand its warehouse in the US.
Controlling such costs, say some analysts, could prove a challenge. “The cost of growth will keep coming in higher than expectations,” says Sanjay Vidyarthi, an analyst at Liberum – which is one of the few brokers in the City to have the retailer on a sell, with a target price of £30.
Together, these extra costs mean that the group’s full-year operating margin will be about 6.5 per cent – rather than the 6.9 per cent forecast by some analysts.
With its top-line still growing at an enviable rate, few analysts seem concerned by the retailer’s business model.
Mr Robertson dismisses the sharp slowdown in the UK – to 21 per cent year-on-year – for the eight weeks to February – as a “blip”. “You can’t judge us on the eight weeks,” he says, pointing out that revenues still rose 34 per cent for the six months to February 28.
Unlike other much-hyped internet stocks, such as Ocado, Asos has been consistently profitable. Last year, pre-tax profits were £55m off revenues of £770m – up 37 per cent from the year before.
Instead, the doubts stem from valuation, which has become an expensive stick to beat the company with.
“The growth of the business has been phenomenal,” says Mr Vidyarthi of Liberum. “Even on revised expectations it is still a growth stock. But it’s been trading on the wrong multiple.”
Asos was – until the float of fellow dotcom retailer AO World – comfortably the most expensive retail stock in London. The retail sector as a whole has been trading at close to 20 times forecast earnings, which some analysts say is bubbly. By comparison, Asos trades at a price to earnings multiple of 114.
“When [Asos] goes through a period of consolidation, it will raise more concerns than if it was a retailer with stores growing at 5 per cent per annum,” says Mr Stevenson of Peel Hunt. “Operationally, you cannot fault what they have said. This is all in the context of the valuation.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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