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The Outlook for Asos

VIDEO: Online fashion retailer Asos has issued two profit warnings in recent months, but Morningstar analyst Jelena Sokolova is optimistic it can bounce back 

Holly Black 17 October, 2019 | 10:08AM

 

 

Holly Black: Welcome to the Morningstar sector review. I'm Holly Black. With me today is Jelena Sokolova. She's an equity analyst at Morningstar in Amsterdam.

Thanks for joining us.

Jelena Sokolova: Hi. Thanks for having me.

Black: So, we're talking today about online retail because we've had ASOS release its full year results. Can you tell us a bit about what was in the update?

Sokolova: Yeah. So, the results were more or less in line with expectations and also with management guidance that it released the updated guidance in July when it profit warned. So, the results were more or less in line with that guidance. No big surprises.

Black: So, a couple of things that I spotted in the report were profits are going to be down 68% this year, and they're now working to resolve some issues they had at warehouses and with other operational sort of problems. But despite that the share price is up today. What's the reason for the mismatch?

Sokolova: Yeah. So, first of all, as I mentioned, the bad news was already known by the market. So, the share price also has been down very much in in July when the profit warning happened. Now, the results were in line. The company said that they have made a good progress on the resolution of the warehousing issues. Now, they basically have to invest more in marketing and price proposition to get the customers back as well. So, they're also signal that they will be focused more on cost control within the organization, which I think was taken positively by the market and also on the capital discipline now that the warehousing infrastructure was developed in the main global markets. Also, to mention that the shares are now trading at less than half of the peak levels in 2018. So, that also helps explain the positive market reaction.

Black: So, what's the outlook for ASOS like going forward? And you know, for the whole online retail space, is it still looking healthier than High Street retail?

Sokolova: Yeah, definitely so. Even in the U.K. market, which is the most mature market for ASOS, the growth has been 15% this this year with 7% growth in active customers. And that compares to very low single digit growth in general apparel sales in the U.K. So, clearly, the market share is being taken by the online players and we see the same trends happening in the U.S. and also in Europe. In continental Europe, the online penetration is still below that in the U.K. So, there could be more upside potential. As I mentioned, for ASOS, U.K. is the most mature market, but it has upside for growth in European markets and the U.S. markets where it is ramping up now, will be also locally supplied from the local warehouses. The potential is big but the competition on the online space is also in intensifying.

Black: Yes. So, one of the things that's made ASOS so successful is it had this first mover advantage. But we now see a lot more players in the space. Are there any other companies that you like?

Sokolova: So, in the online apparel space, I'm covering Zalando, ASOS and Farfetch. Those are the three that I'm focused on. I think the Zalando is currently fairly valued. I think that ASOS had upside potential. It was a 4-Star stock up to today's announcement and big share rally. So, from now on the margin of safety for investment has shrunk in my view. I think Farfetch is an interesting player in sort of a pure play luxury online space, which is growing faster, and penetration is lower, and the shares have been beaten down also since the IPO. I think that stock could be an interesting one to have a look, but of course, very risky as well, because the company is still not generating profits or cash flows.

Black: Jelena, thank you so much for your time.

Sokolova: Thank you.

Black: And thanks for joining us.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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