The 10 per cent fall in Asos's (ASC) shares on the day of the release of third-quarter numbers looks overdone to us. The group revealed that, despite strong top-line growth of roughly a fifth during the period under review, full-years sales would land at the lower end of the expected guided range. That means Asos expects to grow revenues by around 25 per cent this year, the lower end of the 25 to 30 per cent guided range.
However, this is an outcome largely dictated by the decision to prioritise full-price sales over wider promotional activity, illustrated by the fact that retail gross margins expanded by 130 basis points – significantly ahead of projections. Overall, bosses say expanded margins will finish up the year 100 basis points stronger, leaving pre-tax profits on track to meet consensus expectations of £101m. Other factors played a small part in holding back growth too, including the introduction of new privacy laws in June and bringing new warehouse facilities on stream across Europe and the US.
But we’re not the only ones who think the market reacted disproportionately: analysts at Liberum called the sudden drop in the shares an “overreaction”, while brokerage Peel Hunt left forecasts unchanged. Numis said it continues to believe in Asos’s “outstanding customer proposition”, especially as “investments are supporting and driving a vast long-term profitable growth opportunity”. On that note, capital expenditure plans remain unchanged; the group still plans to spend between £230m and £250m on improving its technology platforms and expanding its warehousing facilities. At the time of half-year results, chief executive Nick Beighton said strong demand in the US had prompted the accelerated opening of a new distribution centre in Atlanta, which analysts at Liberum reckon could add £4bn to group net sales.
Regardless, the 25 per cent de-rating in the Asos's share price since mid-March suggests that Asos is still vulnerable to bad news, no matter how fast the company grows compared to the wider retail market. At the time of half-year results in April, the shares fell once again after profits missed the mark, while disappointing domestic growth revealed in October last year also kept the share price under pressure. The answer is partly found in the shares’ punchy valuation. Growth at this level doesn’t come cheap, but it also leaves precious little room for error. When investors shell out more than 60 times forward earnings (based on a share price of 6,030p and Peel Hunt’s forecast for EPS of 96.6p this year) for the shares, suffice to say they’re not prepared for disappointment. Analyst have downgraded their EPS forecasts for 2019 by 7 per cent during the past 12 months, according to Bloomberg consensus figures.
But all that said, the group's market share is still growing, as are active customer numbers, average basket values and average order frequencies. Conversion rates are also on the rise, which suggests customer engagement is going well, too.
