ASOS performed well in Q1 of 2017 on the back of increased capital investment alongside foreign exchange benefits. Over the quarter, the stock returned 21.78% and 86% over the 12 months to the end of Q1 2017. Earlier this month the company released a strong set of financial accounts for the first 6 months of its 2017 financial year for the period ended 28th Feb 2017.

Company Profile

ASOS is one of the more widely recognised companies within our AIM portfolio. It is a global online fashion brand has distribution capabilities across the world, selling over 85,000 branded and own-label products through mobile and web. ASOS has fulfilment centres in the UK, US and Europe and customers in almost every country in the world. While investors often consider AIM companies as being small with relatively low market share, ASOS by no means fits this classification. The company has a market capitalisation of £4.99bn and an ultimate business goal of becoming ‘The world’s no.1 destination for fashion-loving 20-somethings’.

Competitive Advantage

ASOS is highly competitive within the market due to its worldwide shipping capabilities and its ability to offer services via web and mobile apps in 8 different languages. The company is unique in the way that it focuses on creating ‘the best curated edit of third party brands together with the ASOS Brand itself’ to give customers the most all-encompassing choice of fashion available anywhere else within the market.

Within the fashion industry, it is important to stay current and up-to date with the latest fashions in order to compete with other firms. ASOS’s online offering and distribution capabilities mean that it is able to keep as up to date as possible at all times.  The speed of its technology allows the company to launch 4,500 new styles every week, and to offer over 85,000 products in stock at any one point in time.

ASOS recognises the importance of social and ethical issues within the fashion industry and works hard to ethically source products throughout the supply chain. It is a socially responsible company which gives the company a competitive advantage over less ethically minded clothing retailers.

Quality of Earnings

Despite a challenging macroeconomic environment, ASOS has performed well over the quarter as a result of strong growth through investment in technology and infrastructure. This has resulted in increased levels of customer acquisition through investment in the mobile app, and the transition to its new Eurohub 2 warehouse in March. Both of these points are expected to benefit the company in the long term by increasing sales and processing capabilities.

Earlier this month, ASOS reported its latest figures for the first 6 months of its 2017 financial year for the period ended 28th Feb 2017. The results showed strong sales growth in the UK as well as accelerated international performance, with encouraging underlying performance alongside positive FX movements. Sales growth is expected to be around the 30-35% range for this financial year due to an acceleration in international performance before normalising to 20-25% in the medium term.

ASOS has continued to deliver its growth strategy over recent years whilst still maintaining a strong cash position, laying the foundations for a strong balance sheet. The company expects this to support growth and business investment over the long term.

Growth Potential

With current levels of investment in increasing efficiency and capabilities in distribution and sales, long term growth potential is relatively high for ASOS. In recent years management has been pursuing a long term growth strategy heavily involved in investing in technology and business infrastructure which has worked to increase sales and profit growth rates over the long term. This is expected to continue, with a new EuroHub distribution facility, a new digital interface for stock monitoring, and key improvements in mobile and online offerings all working towards maintaining long term profit and sales growth.

Key Risks

  • Brexit

As a UK company, naturally Brexit is a concern for ASOS due to the potential impact on company revenues from changes in exchange rates as well as potential changes to trade agreements. Due to the company’s size and global nature, we believe this risk is reduced due to continued overseas demand. Based on full year 2016 sales data, the UK represents 43% of company sales, with the US representing 12.7%, the EU 26.7% and the rest of the world representing 17.5%. With 57% of revenues coming from overseas, a weaker Sterling is beneficial.

  • Exchange Rate Risk

As a global company, ASOS is exposed to a high level of exchange rate risk. This risk is mitigated by hedging activities including the use of forward foreign exchange contracts to offset the impact of exchange rate changes on cash flows . During the period of uncertainty  and market volatility following on from Brexit, ASOS increased the percentage of net exposure that is hedged from 80%  to 100% to protect the business.

Overview

Overall, the financial data coming from ASOS is largely positive in our view. The company looks to be in a relatively strong financial position in terms of its balance sheet, and appears to be achieving positive results as a result of the management’s long-term growth strategy.  The company continues to feature in the AIM portfolio. Going into Q2 we continue to view ASOS as being well positioned and well managed given the current market environment to continue current growth rates.

 

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