Amazing what the absence of a profits warning can do. Asos, which had delivered three in six months, had no fresh setbacks to confess on Tuesday and the share price rebounded 14%.
Is it back to races then? Should investors keep their eyes on “the very big prize”?, as the online retailer’s chief executive, Nick Robertson, puts it, that is “to be the world’s leading fashion destination for twentysomethings.” The next staging post is defined as annual sales of £2.5bn, which would be quite a jump from last year’s £975m.
Given the current rate of progress – a 27% rise in revenue, with Britain doing much better – Asos clearly has a sporting chance of getting there in the hoped-for five or six years. The question, though, is how much investment is required to service that growth, and what level of profit margin will emerge if/when the destination is reached?
Even a year ago, the Asos fanclub thought the company was capable of running with pre-tax margins of 7-8%. But that is off the table for the time being. Robertson has already said Asos will need to operate at 4-5% for a while as it improves its infrastructure (in Barnsley, and then at its “Eurohub” in Grossbeeren in Germany) and adapts its prices to local markets. The latter was the factor that caused havoc last year when sterling strengthened and twentysomethings in Australia and Russia found their dresses became 20% dearer.
Analysts’ new working assumption is that a 6% margin might be possible come 2019. That would imply pre-tax profits of £150m, compared with £47m in the last financial year. Terrific if it happens, of course. But, given that profits are set to be flat this year, a hefty dose of scepticism is required.
The past year has demonstrated that operating in 200 countries presents huge logistical challenges; the new local pricing model should solve last year’s headache, but others will emerge.
Rather than dream of what might happen in 2019, investors should take the current pulse: Asos remains a great pioneering business and Robertson deserves the acclaim. But the shares, even after the plunge from £70 to £22 since February, are rated at 50 times this year’s earnings. That’s expensive. Bulls are still expecting too much, too soon.
