Asos (ASC) may have delivered double-digit sales growth in the first six months of the year, but pre-tax profit slumped 10 per cent to £18m because the online fashion retailer slashed prices and pumped money into its warehousing capacity. Together with higher rate of returns in the UK and Germany, that left the retail gross margin 270 basis points lower at 46.8 per cent.
Chief executive Nick Robertson explained the reason for the price cuts: international sales started to decline last year as sterling strengthened. Therefore, it was necessary for Asos to rebase pricing to boost sales and attract customers. As a result, prices fell in Australia, New Zealand and the eurozone.
Furthermore, Asos invested £3.1m in its start-up in China, while warehousing costs jumped 44 per cent. The latter was down to an upgrade carried out at the core UK Barnsley warehouse, which disrupted logistics and resulted in additional one-off charges. Labour costs per unit at the warehouse increased to 81p from 76p, although that should fall over the second half as the new facilities deliver operational benefits.
However, Mr Robertson warned that as Barnsley becomes more efficient in the second half, this will be offset by increasing stock levels and investment in the less-efficient European warehouse in Germany, from which Asos currently despatches nearly a quarter of total EU orders - a figure expected to rise to 35 per cent by the year-end. "So, while winning on the one hand, we'll be losing on the other," says Mr Robertson. Bringing the European warehousing operations up to scratch will take 18 months to two years, he adds. Despite all this, the half-year results did come in slightly ahead of consensus pre-tax profit forecasts of £16.3m, thanks to lower marketing expenditure and strong third-party revenues.
On a side note, Asos is also experimenting with alternative delivery strategies, including multiple pick-up points. A trial with Boots has been successful and is being extended. The cost of this type of delivery is less than a traditional courier, but more expensive than a Royal Mail standard service.
Broker Investec Securities expects pre-tax profit of £46.5m this year, giving EPS of 43p, down from £46.9m and 44p in 2014.
| ASOS (ASC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 3,854p | MARKET VALUE: | £3.2bn | |
| TOUCH: | 3,850-3,859p | 12-MONTH HIGH: | 5,309p | LOW: 1,742p |
| DIVIDEND YIELD: | nil | PE RATIO: | 88 | |
| NET ASSET VALUE: | 263p | NET CASH: | £65m | |
| Half-year to 28 Feb | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 482 | 20.1 | 18.6 | nil |
| 2015 | 550 | 18.0 | 17.6 | nil |
| % change | +14 | -10 | -5 | - |
Ex-div: na Payment: na | ||||
