Year-end forecasts are set to be achieved, as the share price shoots up.
Online fashion retailer ASOS (LSE: ASC),whose shares have plummeted since their overvalued peak around the middle of 2011, received a boost today when third-quarter results revealed strong sales growth. In response, the price rose 16%, to around the 1,730p mark, but that's still quite a way short of June's 2,500p levels.
So, is rapid growth back on track for the long term, or are we just not quite at the end of pre-saturation expansion in the online rag trade?
Overall sales for the quarter were up 46%, with the bulk of that rise coming from overseas -- UK sales grew by 10% (which is really pretty good after they had previously appeared to have flattened), with international sales nearly doubling, at 93%.
International sales, at 58%, now account for more than half of ASOS's total sales, and that's where future profits will have to come from in order to support today's optimism.
Future growth
At 1,730p the price represents a P/E, based on full year estimates, of 47, which is rather high. But trading, we were told, is on track to meet those estimates. It's going to take a great performance next year to meet City forecasts of a 40% earnings growth (and hopefully pay the company's first ever dividend), but if it is achieved, it will bring that P/E down to a more manageable 33 or so.
To get it down to the long term average FTSE value, which tends to be around 15, earnings are going to have to treble. And it will revert to the mean one day, no matter how high-flying it is today, whether by rising earnings or by falling price -- let's hope it's the former.
Is it possible to satisfy the current optimism? Well, in the UK, growth has tapered off and market penetration is approaching its maximum. But European business is doing pretty well, with EU sales growth up by 33% in Q3 (and that's with two out of the four European sites being in the struggling southern economies of Italy and Spain), so there is certainly good potential there.
American sales grew by 146%, to £13m, but that was from a very small base. Decent penetration there could make all the difference in the next few years, but it's a notoriously difficult market for foreign firms to crack.
Overall, it's a tricky path to tread between optimism and fear, but for me it's currently tilted too far towards the shiny uplifting side. I do hope ASOS manages to justify today's valuation, but for me the risk/reward ratio is still too high.
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