Today’s trading statement from ASOS (LSE: ASC) (NASDAQOTH: ASOMF.US) is rather mixed. On the one hand, it is very encouraging because the online fashion retailer’s UK sales have increased by a highly impressive 24%, which is clearly a high rate of growth given the squeeze on consumer spending in the UK.
However, on the other hand, ASOS’s results provide its investors with another headache. Sales for the business as a whole may be up by 8%, but international sales have fallen by 2% and, furthermore, ASOS’s gross margin has dropped by 1.7% as the company has invested in pricing in order to maintain its overall sales momentum.
As a result, shares in the company are down 6% at the time of writing. Is it worth cutting your losses and selling out of ASOS now? Or, should you hang on to your slice of the company?
International Challenges
Clearly, ASOS’s foray into international markets is proving to be more challenging than it had anticipated. However, its performance outside of the UK is not as disappointing as it may at first seem, since when the impact of currency headwinds is excluded, ASOS was able to increase its international sales by 4% in the quarter (and its overall sales by 12%). This figure is more indicative of the performance of the business and it shows that ASOS is making progress outside of the UK, albeit at a slower pace than the market would like.
The problem, though, is that ASOS is investing heavily in pricing so as to generate such strong overall sales figures. While this may be a necessary evil in order to gain customers in new territories (and hang on to existing ones in the UK), it does little to aid ASOS’s bottom line growth prospects. As a result, ASOS is forecast to deliver its third successive decline in profitability this year, with earnings set to fall by 4%.
Valuation
Of course, the major issue with ASOS as a potential investment is its valuation. It trades on a price to earnings (P/E) ratio of 50.9, which means that only stunning top and bottom line growth is likely to be enough to lift its share price higher. So, while today’s update is encouraging and shows that ASOS continues to make excellent progress in the UK while building a viable business abroad, the market is expecting much more. Unless ASOS can deliver improved top and, particularly, bottom line performance in the short to medium term, its share price could come under further pressure.
Looking Ahead
As highlighted in ASOS’s trading statement, the last quarter was a challenging one. The company focused on completing its automation programme at its warehouse in time for the key Christmas trading period and international trading conditions remain challenging. Both of these factors inevitably held back its sales figures.
Despite this, ASOS is performing well as a business and, in the long run, could establish itself as a global player in the online retail space. However, a great deal of this success appears to be reflected in ASOS’s share price and, as a result, anything but stunning top and bottom line growth is likely to be punished by the market.
So, while ASOS could prove to be a worthwhile long term investment, its share price is likely to come under further pressure over the short to medium term. As a result, it doesn’t appear to be worth holding at the present time.
