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ASOS counts the cost of expansion

Daniel Lane

Daniel Lane - Fidelity Personal Investing

It’s been a “disappointing” year according to ASOS, with the online fashion retailer today posting a huge drop in profits due to problematic expansion plans.

ASOS: will US expansion deliver?

"With the benefit of hindsight, we were not adequately prepared for the additional complexities," the company said, referring to continuous hurdles to business, particularly in its German and US outposts.

While the firm has increased efforts to correct the path through warehouse robot installation and falling back on its Barnsley hub to service European territories, it hasn’t quite worked. Profits dropped almost 70% to £33.1m for the year.

However, this figure falls in the middle of the £30m-£35m band the company projected in its July profit warning. And while that was vastly below analyst expectations of £55m, and the £102m reported in 2018, there are signs of positivity for today’s shareholders.

Shares are up 21% at the time of writing and despite a drop in profits, the company reported a 13% rise in sales for the year. The share price jump brings it back above July’s pre-warning level but investors used to much higher valuations will be hoping this is just the beginning of the recovery.

A rocky road for ASOS

Getting the firm’s Atlanta warehouse up to full function proved a lot more difficult than anticipated, with trading updates letting investors know of the knock-on effect this could have back in March. Then in July, slower than expected hub automation in Berlin and issues with third-party brands getting through US compliance meant products just weren’t hitting the digital shelves.

It has certainly been a year-long logistical headache but one management would have hoped they could deal with. Now that the problems have been addressed, investors will need to look to three key areas, assuming Atlanta and Berlin are fit and ready to go.

The first is margin pressure, and the firm’s ability to deal with it. ASOS was dragged into the retail sector’s discounting war before Christmas, meaning big hits to the bottom line, in order to keep consumers happy. But this pressure started well before then. The company said profit margins would have to be lowered from 7%-8% to 4% back in 2014. That became 2% in December and, with profits in the current £30m-£35m range, means margins look closer to 1% now.

The second is sensible expansion. Now that the company has seen just what it takes to look abroad, investors will look for evidence that any new strategy will be filled with the learnings from this time round. High street overexpansion has crippled a lot of big names over the past two years and, while many thought the likes of ASOS and its online friends were immune to the same cost pressures, tech-based operations bring a lot of their own.

The final area to look at is competition. A few years ago ASOS seemed to have the online fast fashion category sewn up but that’s just not true anymore. Boohoo has a much bigger market cap these days and there’s also Germany’s Zalando, which ASOS will have to beat head-on.

And with online retailers all starting to look like department stores now, they shouldn’t discount Next from the race. The company already makes half of its turnover from its online proposition and is slowly rolling out third-party labels too. Game on.

More on ASOS

Five year performance

(%) As at 15 Oct 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
ASOS 67.9 75.9 11.0 -15.0 -48.5

Past performance is not a reliable indicator of future returns​​​​​​​

Source: FE, as at 15.10.19, in local currency terms with income reinvested

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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