Shares in ASOS (ASC:AIM) advanced 3% to £34.74 on Wednesday despite news of slower third quarter sales, after the online fashion retailer said it expected annual profit to be at the top end of market expectations.
Investors were relieved that overall sales had grown through the pandemic, and probably heartened by the absence of the ethical sourcing issues that have emerged at ASOS’ fast fashion rivals Boohoo (BOO:AIM) and Quiz (QUIZ:AIM).
TOWARDS THE TOP END
In today’s update, ASOS said it now expects pre-tax profit for the year to August to be ‘towards the top end of market expectations, despite material incremental COVID-19 costs’, with total retail sales having ticked up 10% to £983.3 million in the four months to June.
Serving fashion-loving 20-somethings around the world, ASOS reported a steady improvement in sales growth through its financial third quarter, as well as improved levels of profitability and cash generation.
That said, over the six months to February, retail sales had grown 21% year-on-year, so the third quarter actually revealed a slowdown over the last four months, notably in the UK and US reflecting a shift in the product mix due to COVID-19 lockdown measures.
ASOS insisted sales growth had improved materially since lockdown measures were enforced in March, with performance supported by strong growth in lockdown categories including casualwear and activewear, although these generate a lower gross margin than occasion-led wear such as dresses.
POSITIVE FREE CASH FLOW
Chief executive Nick Beighton said ASOS is ‘on track to deliver strong year-on-year profit growth and to return to positive free cash flow for the full year’, although management remains cautious in the outlook for consumer demand, ‘particularly as the medium-term economic consequences start to emerge for our 20-something customers.
‘We expect continued limited demand for occasion led wear until a more normal pattern of social events resumes, the timing of which is hard to predict, particularly in the context of a risk of a second-wave.’
WHAT THE EXPERTS ARE SAYING
‘Weaker demand for dresses and formalwear made sense given people weren’t going out for a night on the town,’ commented AJ Bell investment director Russ Mould.
‘Unfortunately, ASOS didn’t have enough supplies of what customers wanted instead, namely casualwear.
‘It looks like ASOS will have to wait a bit longer for a return of its normal sales mix. Even though more people are now returning to work and shops and leisure attractions are reopening, it seems there is still subdued demand for a big night out or going abroad on holiday.’
Shore Capital said April’s £240 million equity raise and debt refinancing has ensured ASOS has ‘both the balance sheet and sufficient liquidity to ride through the current storm and emerge in a position where it can continue to invest to chase its global ambitions. The trading update highlights robust overall momentum in the business, albeit the UK and US performances in the third quarter are a significant slowdown from the first half run rate.’
Liberum Capital stuck to its ‘sell’ rating, arguing this was a ‘very weak’ quarter and that ASOS’ underperformance versus peers highlights ‘the challenges of a wholesale model where lead times are long and capital is tied up in inventory’, which makes it ‘difficult to quickly change the product mix, as seen in the UK and US whereas EU and ROW have seen lockdown measures ease earlier.’
