Asos Plc

Who is Asos ?

ASOS plc is a global fashion destination for 20-somethings, selling cutting-edge fashion and offering a wide variety of fashion-related content, making ASOS.com the hub of a thriving fashion community. ASOS sells over 87,000 branded and own-label products through localised mobile and web experiences, delivering from fulfillment centres in the UK, US and Europe to almost every country in the world. ASOS tailors the mix of own-label, global and local brands sold through each of eight local language websites: UK, US, France, Germany, Spain, Italy, Australia and Russia.

Metrics

The top line revenue shows growth of 20.5% YoY for the past 4 years.

The gross profit shows growth of 21% YoY for the past 4 years.

Revenue31/08/201831/08/201731/08/201631/08/2015
Total revenue2,417,3001,923,6001,444,9001,143,000
Cost of revenue1,180,200965,300722,700569,900
Gross profit1,237,100958,300722,200573,100

The operating expenses shows SG&A growth of 21.5%

Research development
Selling general and administrative1,135,200878,700659,200522,100
Non-recurring
Others
Total operating expenses2,315,4001,844,0001,381,9001,092,000
Operating income or loss101,90079,60063,00051,000

Net income growth of 22 %.

Net income82,40064,10024,40036,800

In summary, the income % of revenue has reached 2%.

Asos is a pure growth story, but the first sign of margin decline or slowing growth will wipe out net income for a number of years.

Todays news (17 Dec 2018)

The trading update today contains information that retail gross margin has declined 160bps (1.6%).

This is hugely negative given that, as we see above, the income / revenue was 2%. This means that 75% of the net income might be impaired. The market reaction was to open ~40% lower (in fact – 43% was traded by LEM).

Shareholder losses

The shareholder was down ~40% on the year. With the latest move the shareholder is now down ~65% on the year with little sight of recovery given trading activity and new sellers at the lower reset price.

Multiples

Before today the multiple was >40x. Based on todays price and historical earnings the multiple is now at 25x. The FTSE 100 average is 13x.

Therefore, if the market decides to price at “normal” levels, one may expect a further 50% decrease in share price.

A good comparable might be Next (50% bricks & mortar, 50% online) that trades at a more sanguine 10x. Using this valuation would produce a similar decline for Asos (of 50%) which is effectively trading at a large premium to the sector.

Balance sheet

As with many growth stocks, there is no balance sheet support.

The liabilities are 568 mill and the assets are 1,000 mill. So the equity is 438 mill compared to a market cap of 2,100 mill.

Asos is a pure multiple & growth play.

Summary

A significant amount of hope (growth) has been priced into Asos as an online champion. Some of this was removed with the trading statement and the market has reacted to this.

Growth (14%) does remain, but it appears to be coming at a cost (margin decline 1.6% out of 2%).

The share price will be volatile as the new information establishes a new base of expectation.


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