The ASOS (LSE: ASC) share price is up 6% as I write. This gain has been triggered by the news that the online fashion retailer has agreed to pay £265m to acquire the Topshop, Topman, Miss Selfridge and HIIT brands from Sir Philip Green’s Arcadia Group.
I’ve avoided ASOS shares in the past, but this development makes me wonder whether I’ve underestimated ASOS’s long-term growth potential. To find out more, I’ve been taking a fresh look at ASOS stock as a potential buy for my portfolio.
Online is in charge
Today’s ASOS deal follows last week’s acquisition of the Debenhams brand by online rival Boohoo.
I think we’re seeing the final confirmation of something that’s been obvious for a while — fashion retailers may still profit from having shops, but future success will depend on a strong online presence.
Topshop and other brands in the Arcadia stable have big store networks but are generally seen as having lagged behind online. ASOS is only acquiring these brands from Arcadia, not their stores. But interestingly, ASOS still expects to generate 40% of sales from the new brands through retail partners. One example given is US department store chain Nordstrom.
My reading of this is that ASOS management still sees growth potential in stores, but doesn’t want the cost and complexity of managing them. That makes sense to me — I think management should stay focused on the group’s core area of online retail.
ASOS share price reflects recent growth
ASOS stock has risen by 50% over the last year, as sales have surged during lockdown. But one downside of this for me as a potential investor is that the shares may now be quite fully priced.
To find out more I’ve revisited the group’s January trading update. This shows that sales rose by 23% during the final four months of last year. Growth was particularly strong in the UK, where sales rose by 36%. However, international sales only increased by 16% — that seems relatively modest to me.
For contrast, Boohoo reported UK sales growth of 40% and international growth of 40%. Why did Boohoo do so much better overseas than ASOS? I don’t know, but I think it will be interesting to see if ASOS’s plans to partner with overseas retailers will produce better results than Boohoo’s online-only approach.
As I write, the ASOS share price stands at about 4,750p. That prices the stock on around 35 times 2020/21 forecast earnings. This is similar to many other fast-growing internet businesses. I think it could be a good level for me to buy the shares for long-term growth.
However, I’m finding it hard to estimate what the likely contribution from the Arcadia brands will be to ASOS sales. The reason for this is that revenue from the four brands being acquired fell from £1bn in 2019 to just £265m last year, due to Covid-19 store closures.
How much of a following will Topshop, Topman, Miss Selfridge and HIIT have after the pandemic? I don’t know. My view is that ASOS will probably make a success of this deal. But I think there’s a chance growth will slow when shopping returns to normal after the pandemic. On balance, I don’t feel confident enough to buy ASOS shares at current levels.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.