ASOS: will US expansion deliver?

Daniel Lane

Daniel Lane - Fidelity Personal Investing

I’ve been granted sole responsibility of a new household chore recently. Along with all the usuals, I’m now in charge of posting unwanted clothes back to the sender on my way to work. I know this because a post-it note on the kitchen table tells me so.

ASOS: will US expansion deliver?

I’m on autopilot at that time in the morning so I just do as I’m told, but one thing I’ve noticed is that the lion’s share of the packages are going back to ASOS. I assumed this meant the dresses inside were no good but now understand it’s a case of ordering three sizes and sending two back - ASOS has seemingly erected its own fitting room in my flat.

I might be late to the party on all of this but as the online retail sector slowly drains the life from the high street, it’s clear that this model of shopping is here to stay. That’s why a pre-Christmas profit warning from ASOS worried investors to the tune of a 40% drop in share price - weren’t they meant to be immune from the UK’s retail woes?

Since then the market has shown us that this was likely a very nervous overreaction but also reveals just how much there was riding on today’s update from the company, at least to settle a few nerves if nothing else.

So, to the numbers - UK retail sales in the three months and six months to February 2019 were 14% and 16% higher than a year ago, with the firm’s websites garnering 171.6 million visits during the month, against 148 million in February 2018.

And after seemingly being sucked into heavy discounting to compete with other retailers before Christmas, average selling prices and basket sizes were reportedly down 1% with average basket values dropping by 2%. Of course, sales growth expectations took a hit last year but the company said its revised guidance of 15% growth is unchanged from February.

Sales in mainland Europe were up 12% however chief executive Nick Beighton pointed to France and Germany being particularly challenging markets, as well as frustrating problems around fulfilling orders in the US. He said:

“Our US performance was behind our plans during the period. As our Atlanta warehouse went fully online, demand far exceeded our expectations. Whilst very encouraging for the longer term, this caused a significant short-term despatch log which we have now cleared.”

Compared to the mood in December, this might seem like quite a nice problem to have but it does raise questions over the company’s initial ability to understand and prepare for life across the pond - when fast fashion isn’t fast there’s a chink in the supply chain somewhere. Investors will be hoping these are just teething problems and the company can recreate the success it has seen in the UK since launch.

More broadly, market movements around the company’s updates over the past few months are a good example of why we all need to consciously avoid the hazards of short-termism. Hanging on quarterly results prevents us from valuing the bigger long-term story playing out despite the short-term headlines, almost always to our detriment.

What’s more, ASOS may be disrupting our shopping habits but that doesn’t mean it’s got the sector all worked out, much to investors’ chagrin. It’s worth remembering that for every company redefining their industry, there will always be unforeseen problems because they are creating their own future and purposefully ignoring the well-trodden path. Another reason why a focus on long-term plans is so important.

It’s tempting to have our interest piqued by companies capitalising on trends and jumping on consumer fads, with a view to boosting next quarter’s earnings. However, history shows us that successful investing is often about identifying those companies who can actively change consumer habits, instead of responding to them, and take control of their own destiny over time. There’s a big difference here.

ASOS shares may be some way off their peak around this time last year but investors drawn to retail will find themselves asking who they’d rather own for the long-term in the sector - and which company in the sector is most in charge of its own destiny. Competitors in the form of Boohoo and Quiz, and even fast fashion high street stores like H&M and Zara, will keep ASOS on its toes and maybe the disruptors are ripe for disruption but if the packages on the kitchen table change I’ll let you know.

More on ASOS

Five year performance

(%)
As at 18 Mar
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
ASOS -36.1 -16.8 92.2 28.8 -57.9

Past performance is not a reliable indicator of future returns

Source: F.E, as at 18.3.19, in local currency terms with income reinvested 

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