- Supply chain pressures increasing
- CEO Nick Beighton stepped down
A pandemic that forced people to stay at home should have been nirvana for ecommerce business Asos (ASC). True, revenue was up by a fifth at the August year-end, but in unprecedently favourable trading conditions its rate of growth was only fractionally better than 2020 – and significantly slower than 2018. Now that costs are being squeezed by supply chain issues, it is forecasting lower profitability for the coming year. Its dream scenario is quickly turning into a bit of a nightmare.
Changes to consumer habits meant that the group's active customer base increased by 13 per cent to 26.4m. But in addition to increased cost pressures, consumer habits are likely to alter as the pandemic restrictions ease over time. When people were stuck at home, demand for casualwear increased, but that might prove to be a temporary effect. So Asos is now forecasting adjusted pre-tax profits of between £110m and £140m for FY2022. This would be around a 30 per cent drop from FY2021.
There were bright spots in international markets. For underlying sales growth, the US was up by a third, making it the fastest-growing region. The group has seen strong demand for its recently acquired Topshop brand in the US and has just signed a partnership with luxury department store Nordstrom. Asos brands will be sold in Nordstrom stores this calendar year and the full launch will happen in the first half of 2022. A click-and-collect service will be rolled out across the whole Nordstorm estate next year.
Chief executive Nick Beighton has stepped down and his successor, who is yet to be announced, will have the challenge of achieving the company's target of increasing revenues to £7bn over the next three to four years with a trading margin of around 4 per cent. Management hopes to achieve this by accelerating international sales growth and adding at least £1bn to its annual own-brand sales – seemingly a tall order if current logistical problems persist.
FactSet consensus estimates give a forward price/earnings (PE) multiple of 16, sliding to 9.5 by FY2025, by which time we will know if the sales target was realistic. The pandemic has spurred further industry-wide investment in online sales, so Asos can expect intensified competition going forward and near-term financial performance will continue to be negatively affected by "longer lead times and constrained supply from a number of partner brands". Far from a buying opportunity, the lowly multiples are a reflection of investor anxiety, as was the double-digit fall in the share price on results day. Hold.
Last IC View: Buy, 8 April 2021, 5,664p
|ORD PRICE:||2,434p||MARKET VALUE:||£2.43bn|
|TOUCH:||2,430-2,438p||12-MONTH HIGH:||5,995p||LOW: 2,300p|
|DIVIDEND YIELD:||NIL||PE RATIO:||19|
|NET ASSET VALUE:||1,035p*||NET DEBT:||13%|
|Year to 31 Aug||Turnover (£bn)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
|*Includes intangible assets of £652m, or 653p a share|