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Retail inventories a pointer to profits in 2019

Retail inventories a pointer to profits in 2019
December 20, 2018
Retail inventories a pointer to profits in 2019

We had probably grown accustomed to gravity-defying ratings as the likes of Apple (US:AAPL) and Google owner Alphabet (US:GOOGL) supplanted familiar names from the top-tier US indices, but it could be argued that the rotation from growth stocks in favour of value plays was already gaining momentum at the tail-end of 2017.

Understanding Apple’s business model is a little more straightforward than getting your head around Google’s, particularly as the ubiquitous search engine could yet run foul of antitrust regulations. In the case of the latter entity – which, like any number of tech plays, essentially embarked on an uncharted course – early valuations proved elusive. Although there were other established search engines, most notably Yahoo, when Google went public in 2004, it was essentially a bespoke offering due to the relative sophistication of its search algorithms.

So even though Google turned earnings positive within three years of incorporation, investors were still essentially faced with a standalone proposition. If there aren’t any reliable benchmarks for sales multiples, then ascribing value is a bit like trying to triangulate a position without any fixed points.

Google was worth around $23bn (£18.2bn) on admission, but even with the recent sell-off, its market valuation has grown at an annualised compound rate of 30 per cent. That’s extraordinary by any standard, but even more so when you consider that early valuations were delivered against a limited trading history and a dearth of meaningful peer comparisons. Analysts – at least initially – were engaged in a process of supposition, with probability-weighted scenarios employed to draw conclusions on the potential size of the addressable market, the likely extent of Google’s eventual share and the return on capital it might be able to achieve – it’s as if valuations had been reverse-engineered.

Some analysts will be having second thoughts on the tech-like multiples ascribed to Asos after the e-fashion group guided for annual sales growth of 15 per cent, against a previous range of 20-25 per cent. Hardly a disaster on the face of it, but the gross margin also contracted by around 150 basis points, while trading in November – “a very material month” – was significantly behind expectations.

Asos lost 37.6 per cent of its market value following the pre-Christmas update, but the sell-off wouldn’t have come as much of a shock to shareholders who have stayed the course. In 2014, the group put out three separate profit warnings and its shares fell 60 per cent in value, but within three years its market capitalisation had overtaken that of high-street titan Marks and Spencer (MKS). And earlier this year, its shares clicked into reverse again, after it emerged that a key shareholder, Danish fashion group Bestseller, had sold 2m shares appreciably below the then market price. The oscillations in the share price, or at least their severity, reflects the forward multiples investors have been prepared to meet in expectation of upgraded forecasts.

Harriet Russell, our retail correspondent, may have a point when she says that: “Asos is still vulnerable to bad news, no matter how fast the company grows compared to the wider retail market”. One of the reasons why Marks and Spencer has struggled over the past decade is that it failed to provide a ‘best in class’ online offering, while other long-standing names, most notably Sears in the US, have gone to the wall because they failed to keep pace with the shift towards online consumption. However, just because you have nailed your digital offering, it doesn’t make you immune to wider consumer/credit trends.