Buoyed by several years of stunning growth, ASOS (ASC) now has its sights set on £4 billion of net sales and becoming the world’s “number one destination for fashion loving 20-somethings”.
Should ASOS achieve its long-term goal of global domination then there’s no doubt that investors will be handsomely rewarded, as they have been in recent times following share price growth of 143% since February 2016.
The trouble is that building this momentum will come at a short-term price after ASOS warned today that capital expenditure will have to increase to between £230 million and £250 million in order to support the “considerable opportunity” it sees. This will mean the AIM-listed company recording cash outflows this year and next, before a return to inflows in FY 2020.
It’s a prospect that some investors found hard to stomach today as shares fell by as much as 10% to leave the company some way short of the record high of 7730p achieved less than a month ago. UBS, for example, had expected capital expenditure of £215 million and £195 million for the next couple of years.
Despite today’s shares fall, the update and accompanying half-year results have not diminished the strong support that ASOS continues to enjoy in the City. And ASOS shares have rebounded sharply, down just 3% at lunchtime.
Strong backers include retail analysts at Liberum and Numis Securities, with ‘buy’ recommendations and price targets of £80 and £85 respectively. ASOS trades on a projected 2018 price/earnings (PE) multiple above 70x.
Source: interactive investor Past performance is not a guide to future performance
Liberum backed the decision to increase spending as the company looks to build an IT framework suitable for an augmented and AI-enabled world.
They said that ASOS was benefiting from scale and first-mover advantage and that the strategy to further entrench its market position was “absolutely the right thing to do, making ASOS a key long-term winner in the online space”.
Numis analyst Andrew Wade added: “We believe ASOS’s investments are supporting and driving a clear, long-term, profitable growth opportunity and retain our positive stance.”
He added that today’s half-year figures were largely as expected, with 10% growth in pre-tax profits to £29.9 million in the six months to February 28. International sales surged 31% to £717 million and now account for 63% of the total after a step up in operations in the lucrative US market.
UK sales were up 22% to £414.5million despite a challenging market.
ASOS made no change to its earnings guidance for this year, with growth of between 25% and 30% based on a margin of about 4%. The company’s medium-term target is to grow between 20% and 25%.
Recent investment has focused on its US hub in Atlanta, as well as increased automation in Europe and at its main UK hub. Work is underway in Barnsley to increase capacity by a further 10% to 22 million units.
ASOS also said it was investing heavily in the “technology, processes and people needed to make a step change in the productivity of AI development processes”.
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