Something significant happened in British retail in late August when the market value of Aim-traded online fast-fashion retailer Asos (ASC) came within a whisker of matching that of Marks and Spencer (MKS), the UK's biggest seller of clothing. Market capitalisation aside, in some respects 17-year-old Asos remains small fry in comparison with M&S, which has a 113-year old history and five times the sales of the online upstart. However, the significance of the market cap equivalence is that it firmly illustrates where investors see the future of the retail industry. And what Asos may lack in size compared with its blue-chip peer, it makes up for with growth: over the decade to the most recently published full-year results, Asos's sales have soared 733 per cent while M&S is selling just 36 per cent more than it was 10 years ago (see graph).
Structural shift in UK retail
Excellent sales growth
Currency tailwinds
International expansion
UK inflationary pressure
March of Amazon
So how has Asos’s turnover and market value risen so quickly, and will the trend continue? Except for a couple of bumps in the road, Asos has largely met or exceeded market expectations year after year. More of the same is expected to be reported by Asos when it publishes full-year results in late October. Indeed, as the company becomes increasingly international – 57 per cent of sales came from overseas last year – there are solid reasons to believe this performance will be maintained despite a soggy domestic retail environment.
In July, a 'third period' trading update covering four months to the end of June revealed a 26 per cent increase in underlying sales, or 32 per cent after accounting for favourable currency movements. Importantly, the growth was underpinned by positive movements in average order value (up 3 per cent) as well as order frequency (up 6 per cent), and retail gross margins remained flat year on year, which implies less cut-price sales than many had anticipated.
Analysts are still nervous about the UK consumer, with broker Shore Capital cutting its expectations for UK revenue growth from 17.7 per cent for the full year to 16.6 per cent at the time of the recent trading update (domestic sales managed a 16 per cent improvement in the 'third period' which wasn’t as high as some might have liked). However, set against these worries, August sales data from the Office for National Statistics (ONS) came in ahead of expectations, suggesting consumer confidence isn’t as dire as newspaper headlines might suggest. What's more, inflation resulting from sterling weakness could ease should the currency strengthen as Brexit talks progress and should the US dollar continue its recent decline. That said, strengthening sterling would weigh on reported international sales.
For those that argue Asos has had a good run and that a recent lull in share price performance should be taken as a warning sign, there’s a counter-argument to say a recovery in UK trading conditions could help support the shares moving into next year. Others believe the rapid ascendancy of boohoo.com (BOO) – now a credible rival to Asos – puts Asos's dominant position in the online, fast-fashion market in jeopardy. But in our eyes, Boohoo has already started turning to non-organic growth via its acquisitions of PrettyLittleThing and Nasty Gal. Asos has yet to fully play the acquisitive card, preferring instead to target growth via new, international websites.
Could Asos even be an acquisition target itself? This idea was first floated in 2012 when it was rumoured online giant Amazon (AMZ) could be interested in adding the fast-fashion e-tailer to its empire. That might be different now the latter has independently launched its Prime Wardrobe service in the US, although it might look to acquire competitors who have already established a business that can absorb a high merchandise return rate as it continues to build its fashion offer.
ASOS (ASC) | ||||
ORD PRICE: | 5,814p | MARKET VALUE: | £4.85bn | |
TOUCH: | 5,809-5,814p | 12-MONTH HIGH: | 6,497p | LOW: 4,574p |
DIVIDEND YIELD: | nil | PE RATIO: | 60 | |
NET ASSET VALUE: | 297p* | NET CASH: | £154m |
Year to 31 Aug | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
2014 | 0.98 | 46.9 | 44.0 | nil |
2015 | 1.15 | 41.2 | 36.8 | nil |
2016 | 1.44 | 63.7 | 61.8 | nil |
2017** | 1.92 | 80.1 | 75.8 | nil |
2018** | 2.34 | 103 | 97.6 | nil |
% change | +22 | +29 | +29 | - |
Normal market size: | 300 | |||
Matched bargain trading | ||||
Beta: | 1.13 | |||
*Includes intangible assets of £144m, or 172p a share | ||||
**Peel Hunt forecasts, adjusted PTP & EPS figures |