Let’s get one thing straight: online fashion retailer ASOS (LSE: ASC) makes good money.
Last year the firm chalked up an operating profit knocking on the door of £47 million. That’s not bad for such a young firm, established in this millennium — during June 2000 to be precise.
Blistering growth
The growth of ASOS is phenomenal. Judging by the numbers, the founding directors had it right with there vision to be the world’s number one online fashion destination for the twenty-somethings. During 2014, just 14 years after establishment from a standing start, ASOS turned over revenue of £975.5 million, up 27% on the year before, which suggests growth remains at full gallop.
The company’s strategy is paying off. By striving to be more than just an online retailer, ASOS works hard to make itself synonymous to fashion for twenty-somethings. The firm draws some analogies, saying it wants to be to young-adult fashion what Google is to search and Facebook is to social networking. It’s a lofty vision for sure, but last year ASOS derived 38% of its revenue from the UK, 10% from the US, 27% from the EU and 25% from the rest of the world — ASOS’s tentacles spread to entwine the globe, and the firm’s vision of world domination actually look like becoming a reality. Not all new millennium dot.com start-ups can say that today!
Why so glum?
You’d never believe the firm’s success after a glance at the share-price chart. After peaking around 7000p at the beginning of 2014 the shares trade at around 3140p today after forming something of a hockey-stick shape on the chart, with the long handle representing the downward plunge. So what went wrong?
The problem seems to be a 14% decline in operating profits during last year. Profits were good, but they didn’t keep rising with revenues and it doesn’t take much to spook investors when the stakes are high, as in the case of ASOS with its high-octane P/E rating. However, that easing of profits is just ‘noise’ in my view. The true course of high growth never did run smooth, and we often see little bumps along the road — growing pains if you like — as firms struggle to cope with the operational and other challenges that rapid change throws at them.
ASOS has more to delight investors with yet, I reckon. Here are three reasons to keep the faith:
1) International sales potential
Earnings’ growth might have stalled as ASOS invests for future expansion, but rising sales keep the growth story alive. The directors see potential to increase sales by more than 150% in the medium to longer term to around £2.5 billion.
More than 50% of sales already come from abroad and the firm sells to customers in around 240 countries. Given the size of populations in foreign developed and emerging markets, the growth potential remains huge.
2) Balance sheet strength
ASOS’s recent balance sheet displays the firm’s financial mettle, with net cash in excess of £74 million and zero borrowings. That’s a strong foundation upon which to build further growth.
3) Strong cash flow
Cash flow supports profits as we can see from the financial record:
|
Year to August |
2012 |
2013 |
2014 |
|
Operating profit (£m) |
13.34 |
54.46 |
46.65 |
|
Net cash from operations (£m) |
16.62 |
74.18 |
68.66 |
ASOS’s potential to detonate explosive earnings growth in the medium term makes for an intriguing investment proposition, despite the firm’s high valuation.
