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ASOS shares shine but lack of guidance leaves analysts in the dark

Brokers are wondering whether the online fashion retailer can improve its underlying gross margin percentage

ASOS PLC - ASOS’s shares shine but lack of guidance leaves analysts in the dark
The 68% plunge in profit before tax did not surprise investors

ASOS PLC (LON:ASC) shares surged on the back of hotly-anticipated results but analysts and investors were left rather puzzled as the financial report was focused more on the past than the future.

After Wednesday’s 274% rise to 3,238p, the shares have oscillated wildly from highs of close to 8,000p early last year and lows close to 2,000p this summer, leaving shareholders disorientated at the very least.

READ: ASOS wants its customers back after a year of “substantial change”

Analysts were only slightly better orientated and many were still pondering what it all means.

ASOS had issued two profit warnings over the year: one last December following a Black Friday cock-up and one in July due to teething problems at its new US and European warehouses.

As a result, the number crunchers were wondering whether the online fashion retailer’s overseas operations were fully functioning and what was happening with its profit margins.

Barclays said the results “answer some, but definitely not all, of the questions”.

For example, the bank was still felt “in the dark on how to think about a growth margin recovery” as management had not guided for “FY20 or beyond” in the statement beyond a comment to say capital expenditure plans remain around the £150mln mark.

UBS noted that ASOS has in the past provided “specific sales and margin guidance for the following year and the mid-term”, but the only comment this time was to say a “solid start” had been made to 2020.

Shore Capital said: “Clearly there is an opportunity to regrow operating margins back from the low point of 1.3% in FY19 but quite what the trajectory and time line for progression is little more than guess-work at this stage.”

But this was perhaps a wise move from the company after its previous guidance had to be drastically reset by profit warnings.

For the current financial year, the forecasts for profit before tax range from around £50mln to £60mln, up from the £33.1mln in 2019 but well down from the £102mln made in 2018.

Overseas hitches

A major reason for the two profit warnings was the group’s difficulties expanding overseas.

Peel Hunt felt the key question to be answered in the result was whether the automated Berlin 'Euro Hub' warehouse was running smoothly.

“The answer appears to be strongly affirmative,” the broker said, also noting that the US warehouse is also “working well, with clusters delivering next day to key cities”.

ASOS said the Atlanta, Georgia hub, which opened at the end of the 2018 financial year, remains the least efficient in the network but offers “significant headroom for growth”.

Analysts expect Atlanta to require further capital, alongside the future investment in the executive team around the world to support the next steps, deemed by Liberum as “absolutely necessary”.

“This is in addition to the four new independent non-execs that have just been added – all necessary as ASOS clearly underestimated the complexities and core competencies that existed in the group in order to adequately scale,” the broker said.

More positives and negatives

Looking for positives, Peel Hunt expects sales to pick up this year, with “a lot of reactivation activity ahead of peak and a fairly significant assault on Black Friday”.

Liberum said there is “no doubt” ASOS will have learnt from its previous mistakes, though the balance sheet may worsen.

“What remains unclear at this stage is the underlying costs that this will incur relative to the removal of non-strategic costs, both of which are material,” said Liberum.

Analysts remain broadly neutral over the firm, once the largest on AIM, as they wait and see how the big plans come along.

Shore Capital remained at ‘sell’, noting that ASOS shares trade on a one-year forward p/e multiple of 42.2 times versus Boohoo at 43 times but “where we have seen recent earnings upgrades, in contrast to ASOS”.

Peel Hunt’s rating is ‘hold’, as is Liberum, with UBS at ‘neutral’.

“Whilst news flow appears to be improving… and forecasts are stabilising, there is still significant forecast risk, in our view,” said Investec.

Quick facts: ASOS PLC

Price: 2820 GBX

AIM:ASC
Market: AIM
Market Cap: £2.81 billion
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