The number crunchers think ASOS will top forecasts with its sales this year, but they reckon this growth is likely to have been driven by cutting prices, particularly in the US.
“Although we are optimistic on sales growth, we are less so on costs,” UBS said in a note to clients.
“Improving customer acquisition through higher 'newness' and more competitive pricing supports our above consensus FY19 top-line forecast (UBS ~17% growth, cons. ~16%) but the cost of growth doesn’t seem to be easing.
“UBS Evidence Lab data suggests ASOS is investing more margin than previously expected to reaccelerate: 1) customer acquisition and 2) growth in the US. Reflecting this, we are now c.20 basis points below margin guidance for FY19.”
The US is where ASOS – and the rest of the City – see lots of white space that the company can exploit and fill.
But things haven’t exactly gone to plan so far. When the company’s first US distribution centre in Atlanta went live in February, it quickly became clear that more staff were needed to keep up with demand.
“The net result was that the warehouse ground to a halt, deliveries were switched back to Barnsley and the backlog took four weeks to clear,” said City broker Peel Hunt at the time.
According to UBS, evidence is starting to emerge that would suggest US sales aren’t actually going through the roof despite the recent distribution mishap.
“The US is the market with highest promotions and yet inventory age has increased substantially,” note the analysts.
“The US was also the market with lowest newness during these months. This could mean product isn’t selling as well as planned and the US is overstocked – a sign of more future markdown/gross margin pressure.”
Surprise fall in prices
Perhaps that is why ASOS has been cutting prices across the pond, to try to stimulate top-line growth and customer acquisition.
Their data suggests net promotions in the US are up almost 10% year-on-year, while US retail prices are down 9% versus 6% for the rest of the group.
“Proprietary pricing data suggests ASOS is (unexpectedly) increasing promotions significantly in the US.
“Given the magnitude of price investment, we forecast -150bps pressure on the US gross margin, 70bps at the group level. The impact may continue into H120 before the increase in promotions annualises.”
ASOS shares were down almost 5% to 2,701p in late-morning trading on Tuesday.