ASOS plc: The Customer Is Always Right

ASOS (LSE: ASC) (NASDAQOTH: ASOMF.US) has become a darling of AIM and is one of the market’s greatest growth stories.

Unfortunately, the company has stumbled recently and the City has blamed this slowdown on falling margins.

However, it would appear that ASOS’s troubles are not just limited to falling margins — the company has been accused of falling out of touch with customers. 

Profit warning

ASOS’s shares were hit hard last week after the company released a trading statement for the three months to 31 May 2014. The statement revealed that margins, and subsequently profits, would be lower than expected for this year, as the company tried to clear stock.

Specifically, the company forecast that its profit margin for the rest of the financial year would be closer to 4.5%, rather than the 6.5% previously forecast by the City.

The City expects ASOS’s revenue to hit the £1bn mark this year and a profit margin of 4.5% suggests profits of £45m, far below the £65m expectation.

Still, aside from the profit warning, the company did reveal that retail sales for the period  jumped 25% year-on-year, with UK sales increasing by 43% and international sales up by 17%. Further, the number of ‘active customers’ grew by 32% year-on-year, rising to 8.6m. 

However, while UK sales continue to expand faster than international sales, UK profit margins are lower than the international average. The UK market also has a higher rate of returns at around 39%, above the average of 31%.

Since the release of this trading statement, ASOS’s share price has continued to decline as investors fret over the company’s current valuation. So far this year, ASOS’s share price is down around 52%.  

The customer is always right

But along with the aforementioned profit warning, there are signs that ASOS is losing touch with its customers. In particular, there has been an increasing amount of negative customer feedback during recent months. 

When reviewing a company, especially one which relies on customer service, I’ve found that it can be helpful to see what the customer actually thinks — after all, the customer is always right.

What’s more, more often than not, people read reviews before they buy from a company like ASOS. So a large number of bad reviews is likely to mean a reduction in sales. 

With this in mind, I took a look at review websites and to try to get an idea of what customers think about the company. On average, ASOS was scored at around six out of ten, with mostly positive reviews. But a worrying number of reviews claimed that ASOS’s clothing was “poor quality” and customer service “awful”.

Even the FT has printed a letter from a dissatisfied customer, who claimed that, “… for some time it has seemed clear that the quality, fabrics and cut of the ASOS range have been increasingly sacrificed as a way of raising margins to meet the demands of the City…“.

Of course, as ASOS has just lowered its margin guidance for the year, we know that the above statement is not correct. 

Nevertheless, negative comment, such as those above from dissatisfied customers, do raise concerns.

What to do?

Of course, only you can decide if ASOS still deserves a place within your portfolio. The trouble with ASOS is the fact that the company has already been discovered and as a result, investors are prepared to pay a premium for the shares.

But there are other opportunities out there. The key, when searching for growth stocks, is looking under the radar. You want to get on board while the company is still an unknown quantity.

Analysts here at the Motley Fool have identified a share that we believe has the potential to nearly double profits within the next four years. So, if you're a keen growth investor looking for ideas, download this exclusive report entitled "The Motley Fool's Top Growth Stock For 2014".

The report is completely free, but you've only got a limited time to claim your copy. To claim before it's gone -- click here today -- it's free.

Rupert does not any share mentioned within this article. The Motley Fool owns shares in ASOS.