ASOS plc
17/04/2014
Ticker: ASC:LN
Index: FTSE AIM All-Share
FTSE AIM 100
FTSE AIM UK 50
FTSE
AIM All-Share - Retail
Price: £ 43.40
52-week Low: 29.59
52-week High: 71.95
Mkt Cap: £ 3,607.66m
Free Float (%): 63%
Performance (%) 1m 3m 12m
ASOS shares -21 -25 +58
FTSE AIM 100 -7 -9.5 13
Business
Description
Sector:
Apparel Retailers
ASOS (which stands for As Seen on Screen) is a global online
fashion and beauty retailer selling over 75,000 branded and own label products.
ASOS is specialising in discount celebrity-style fashions and it has seen
incredible growth rates the last few years. They differentiate their services
by offering free shipping to all customers in over 241 countries.
The
Success Story
ASOS has succeeded in providing “fast fashion” product
achieving high growth rates. The company benefits from being online only
apparel retailer as it has no store leases, enabling it to operate and compete
even with very low operating profit margins. As the company has no stores, it
is focusing on providing a better on-line experience and fast delivery by
investing in IT infrastructure and logistics. In addition, as the company
targets 20-something customers, a group that is generally budget constrained,
it has committed to low prices and faster return processing. These developments
will undoubtedly contribute to the success of ASOS on becoming the “No 1 Online
Fashion Destination for 20 Somethings Globally”.
H1 2013/14 Results (Ending on Feb 2013)
ASOS recently announced its first-half results with total retail
sales up 34%, in line with analysts’ estimates. However, the UK and RoW sales
were lower than expected while EU and US sales exceeded analysts’ expectations.
We expect UK sales to grow at lower rates and be influenced by pricing policy,
delivery services offered and a broader offer of brands (New Look and River
Island recently added). The improvement in the IT infrastructure especially the
optimization of the mobile and tablet apps is expected to play an important
role in the future customer attraction as mobile/tablet traffic was 37% and
it’s growing with accelerated rates.
Management guidance for EBIT this FY is 5m lower than the
previous estimate mainly because of £3m extra losses in China and £4-6m losses
resulting from the “Euro-hub” in Germany.
ASOS has seen its retail sales rising 34% y-o-y to £472m, a
figure that is crucial for the management to achieve its target of £1 billion
sales by the end of this financial year (a year earlier than the management’s
guidance). More importantly, international retail sales rose 35% consisting 61%
of total retail sales.
The balance sheet remains in good shape with no debt and cash
reserves of £36.9m on 28th February 2014. In addition, capital
expenditures are expected to be £68m for the current financial year (Previous
estimate: £55m).
ASOS managed to increase active customers by 36% to 8.2m at
the end of Feb 2014. There are 9 local language websites: UK, US, France,
Germany, Spain, Italy Australia and recently launched local websites in Russian
and Chinese. It seems that local websites contribute in the growth of sales as
in countries such as Germany, Italy, France and Spain revenue growth surpasses
50%.
The management is still positive for this year’s outlook and
is expecting the recent developments to bring high growth rates in. There seems
to be a significant improvement in operational efficiency across all countries:
·
US warehouse will result in 5% cost savings.
·
Delivery speed is continuously improving in all segments.
·
UK warehouse automatizaton will result in a productivity loop
picking from 75 to 250 items per hour.
Having delivery times improved and country specific websites
launched, ASOS has to offer a very promising sales growth in the future.
Cash
Flows
ASOS is proving its ability to generate cash from operations
by showing a £182,000 in net cash generated from operating activities (before
exceptional items). Cash outflows from investing activities are expected to be
higher this year (£34m for the first half) due to the investment in IT and
logistics and the expansion in China and Germany.
Recent
and future developments
As ASOS is still at its early growth phase and sales are
expected to reach £1B by the end of this year, the warehouse capacity is starting
hitting its limits. As the company expands, we expect certain developments to
result in increased efficiencies and cost savings:
·
Mechanised dispatch and picking solution in UK warehouse
which will result in picking from 70 to 250 items per hour. With picking
representing 50% of the warehouse cost, this development is expected to bring
significant cost savings in the near future.
·
New warehouse in China and Europe (Berlin, Germany).
·
Option to extend the current warehouses in Germany and US.
·
US warehouse already processing US returns and building
stock is the next target which will lead to significant cost reductions.
·
Zonal Pricing (expected to be effective by the end of this
FY) will undoubtedly allow ASOS to compete more effectively globally and
probably will enable ASOS to negotiate better prices with its suppliers.
·
Introduction of ASOS Fit may result in significant reduction
of returns.
·
Possible medium/long term expansion in attractive markets
where online apparel growth is very promising (Japan, South Korea, Middle East,
India and Brazil).
Stock
& Valuation
Q2 trading statement released on 17th March drove
ASOS stock price down to £43.4 (-31% for the period March 17th –
April 15th). This is mainly due to the lower than expected UK and RoW
sales growth, the lower profitability as well as the new higher guidance for
this year’s capital expenditures (68m from 55m because of losses in China and
the development of a European warehouse in Germany).
The estimated value of ASOS stock is £52 based on a 14 year
Discounted FCF model. In our point of view, sales growth rates in UK will start
declining from this year but we are very optimistic for sales growth in the
rest territories for the following years. Specifically, over the next 6 years
we expect sales to grow at a CARG of 11% in the UK, 26% in the EU and 32% in
US. The Rest of the World segment sales are expected to grow at a CARG of 38%.
Geographical
Sales Split (Current and Expected): Time for US and RoW
As it has already been mentioned ASOS has seen “huge” sales
growth the recent years which are expected to reach £1b by the end of this FY. Thereafter,
retail sales are expected to climb £2b by 2017 and £3b in 2019. Home market
(UK) was the reason ASOS managed to achieve those rates until 2009 when UK
sales accounted for 72% of total. However, the scene seems to change
dramatically with RoW sales expected to represent 42% (30% in 2013) and EU and US sales to gain just some more
ground by 2019 (26% and 13% respectively).
Competition
The competition that ASOS faces is quite intense. ASOS is
competing with many international companies as well as domestic retailers in
each country that it operates. The main competitors of ASOS are NEXT plc, New
Look Retail Group Ltd, Arcadia Group ltd, Ebay, Amazon, JP Boden&co,
M&S, Riverisland.com.
Consumer
Satisfaction
In an analysis of the factors influencing consumer
satisfaction conducted by comscore, online shoppers satisfaction is influenced
mainly from the free/discounted shipping, the ease of returns/exchanges, the
variety of brands/products, the availability of live customer service and a
clear returns policy.
ASOS as a purely online fashion retailer focuses on providing
services that meet clients’ needs listed above. This could be seen as
differentiation of the products and services that ASOS offers and helps the
company develop a competitive advantage and pushing profit margins higher.
Threats
/ Risks
Growing competition: The retail industry is a highly
competitive market especially for those companies that operate online.
Tax issues: The risk that governments in which the company
operates will impose online sales tax is still there.
European economic climate: The debt crisis and the
continuous cuts in government spending across the European countries can
influence the economic climate in Europe and cause buyers to cut back on
overall spending as well as clothing purchases.
Ukraine crisis & Russia: Ukraine crisis and the
relationships of EU with Russia may have an impact on ASOS performance in the
region. However the sales in Russia represent only 2% of total sales so we
would not expect any significant influence.
Exchange rates volatility: Exchange rate movements can
impact sales in all regions (except for UK).
Segment
Analysis
A valuable indicator of ASOS
success across countries is the ranking of the company’s website based on the
monthly visits from individuals aged between 15 and 34 years old in the retail
apparel category. ASOS holds the first
place in UK and Australia while it is in the top 10 in US France, Germany,
Spain, Italy and Russia. In addition the performance, according to these
rankings, is spectacular in Germany (from 11th in 2013 to 4th
in 2014), Russia (from 16th to 6th) and China (from 70th
to 27th).
UK: H1 sales rose 32% y-o-y (21%
for Q2) representing 39% of total sales. The performance in UK has been a
result of various factors:
·
Lower
prices.
·
Introduction
of new brands such as River Island and New Look.
·
Lunch of
android app.
·
Visits in
online retail sites during “Cyber Monday”, “Christmas” and “Boxing day” hit new
records.
·
ASOS mobile
website in the UK’s most visited mobile retail sites (8th).
·
Desktop
Website comes 7th in UK. 1st among apparel retailers
·
Premium
Membership offer
·
Reduction in
delivery time
Although there is still room for
growth in the UK, we do not think that sales growth will remain within the
current rates. The continuous operational efficiency and the investment in
customer offer will maintain the current customers but as UK becomes more
mature market for ASOS, the attraction of new customers looks more challenging.
US sales growth has been better
than expected (31%) and constitute almost 10% of total sales. US seem to be one
of the most promising markets in which ASOS operates as the online apparel
retail market size is the highest in the world (approx. $35B). ASOS managed to
exceed expectations regarding the US sales although the zonal pricing has not
been introduced yet. The new US warehouse in Columbus, Ohio (currently 200,000
sq. m) is already fulfilling orders from returns stock and is expected to
freight stock in the next few months. The order processing from the US warehouse
will probably lead to 5% cost saving as well as the improvement in delivery
speed. The management suggested the result from cost savings will be spent in
digital marketing. Zonal pricing which will be introduced later this spring,
will probably lead to accelerated growth in US as ASOS is not able to
effectively compete at the moment (especially for 3rd party brands)
but we also believe that this movement may lead to lower gross profit margins
in the medium term unless the company can negotiate to buy US branded products
locally.
EU has also taken us by surprise
as the H1 sales in the region grew 65% y-o-y.
The management highlighted 4 key countries: Germany, France, Italy and
Spain all of which have shown more than 50% growth in sales. It seems that
results are impressive for the countries where local websites and local
marketing strategy has been introduced. We believe that there is notable chance
for ASOS to win ground in the EU the next few years. Furthermore, we expect EU
to play an important role in the group’s sales growth when the new euro-hub in
Germany reaches its full potential.
RoW sales in Q2 grew only 3%
(£33m), mainly due to unfavourable currency rate movements, and 14% in H1
(£116m). A weaker local currency has as a result ASOS products to appear more
expensive and adversely affecting sales.
Australian dollar depreciation
against GBP (- 8% the six months to 28 Feb) and local macroeconomic factors had
a negative effect on sales growth in the country. ASOS has strong presence in
Australia, being number 1 apparel retailer in terms of traffic for 15-34 years
old. The Australian sales account for 41% of ASOS RoW sales. The management noted that Russia did not
perform as expected in Q2 due to Russian ruble depreciation (-14% for the six
months to Feb 28th). We believe that the recent Ukraine crisis
results in high political risk for ASOS Russian operations. However, Russian
sales account just for 2% of total sales, so any adverse scenario will have
limited impact on ASOS fundamentals.
China: Unfortunately, the
management declines to provide information regarding sales in China. In our
point of view China has a lot to offer to ASOS as the online apparel retail
market size is the second highest in the world (approx. $18B) and is expected
to grow at quite high rates the next few years. It’s worth mentioning that the
management suggested that operating losses in China will reach £9m this year
(£6m previous guidance) and up to £18m over the next 3 years.
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