Can the Asos share price set new high on trebled profit?

by Jonathan Adams
Asos

Investors in the online fashion retailer Asos may well be hoping the company’s share price could be set for a run at its 2018 high of £76.30 after the company announced it had seen its profits more than treble. Results for the six months to February 28th published yesterday showed the group had booked pre-tax profits of £106.4 million compared to £30.1 million a year earlier. Sales were up 24% to £1.97 billion.

Asos has been one of the big winners of the lockdown periods over the last year as young fashion-conscious consumers spent money on comfortable and stylish home wear. The company estimates its “net Covid-19 benefit” at £48.5 million.

Asos was previously cautious on how well growth over the past year will hold up once lockdown periods end and its customers are again able to spend money on hospitality and holidays, leaving less for fashion. Traditional bricks-and-mortar rivals will also be expected to offer some more competition than they have been able to in recent months.

But the retailer’s management yesterday struck a bullish tone, saying it now expects to hold onto a good portion of its gains over the past year with online shopping habits becoming entrenched. It’s also optimistic over selling more higher-margin “going-out clothes”. A new label, AsYou, focused on “going out” fashion has been established in anticipation of the return to socialising over the months ahead.

In a statement released yesterday Asos said:

“We are confident that with the return to normal, underpinned by the successful vaccine rollout in key markets, we will see further strong momentum in this brand”.

Despite the surge in sales and even more impressive leap in profits driving the Asos share price up by 165% since its low last March following the coronavirus market sell-off, the online retailer’s market capitalisation is still 36.5% off its record high. That was set back in March 2018 when Asos’s revenues and profits were both significantly lower than they are now. If the company can maintain positive sales momentum after the pandemic recedes investors will hope a new high can be targeted.

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Driving Asos’s record results over the six months were 95% growth in activewear sales, 69% growth in sales of loungewear ranges and 114% growth in cosmetics sales. The latter figure was boosted by the addition of new brands including The Ordinary and Charlotte Tilbury.

Asos chief executive Nick Beighton also noted promising signs customers are starting to buy outfits for days out and has started marketing “beer garden outfits”, ahead of pubs and restaurants being allowed to offer al fresco drinks and meals from next week.

The company also upped its full-year profits forecast “in line with first-half performance”. That equates to £190 million in adjusted pre-tax profits, not including the one-off cost of its acquisition of the Topshop brand from collapsed high street fashion group Arcadia.

Despite the positives, the Asos share price dropped by 3.4% yesterday. However, investors will remain confident over the long-term potential for significant further upside if the company’s recent trajectory is maintained. It has actively moved to distance itself from the supply lines scandal that engulfed online fast fashion rival Boohoo last year and has removed its brands from its websites. The company also yesterday said it plans to provide full transparency on the supply chains of newly acquired Arcadia brands Topshop, Topman, Miss Selfridge and HIIT.

The company also announced last night that it is to launch a £500 million sale of senior unsecured guaranteed convertible bonds with a five-year maturity paying between 0.5% and 1% interest a year. The debt issue will help finance the Arcadia acquisitions as well as potentially new acquisitions as well as funding organic growth.



Important
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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