Three profit warnings, factory fires and falling margins – ASOS (LSE: ASC) has had a torrid time of it this year, and the market has marked down the share price by over 70% since its all-time highs in February. But just like a clothing clearance sale, you’ll get more for your money if you buy shares when they are going out of fashion. The market might think ASOS is old news, but is the underlying business still stylish enough for your portfolio?
I think the answer is a resounding yes.
ASOS on sale!
With the way the market has reacted to the fashion behemoth’s profit warnings, you could be forgiven for thinking ASOS was in serious trouble, but the underlying business is ticking along quite nicely. In fact, it grew sales at a staggering rate of 27% this year and sold more clothes than ever before!
But these sales didn’t filter through to the bottom line, so where did they go?
Towards long-term strategy, mostly.
Investing in the future
Capital expenditure for 2014 was £62m, double that of 2013, and while the markets are panicking over ASOS’s reinvestment of profits, I think management is taking the right approach. ASOS has forgone profit now to set themselves up for long-term success, and here is where the money went.
The company expanded its distribution networks, granting it next-day delivery capability in France and Germany. These networks act as a barrier to entry, and in my books, forgoing profits now to gain a discernable competitive advantage is exactly what management should be doing.
Heavy ongoing investment into ASOS’ warehouses will increase their capacity to £2.5bn of global sales. This is a huge expansion, but seems achievable when the company’s growth rates are taken into account. This might hurt profit temporarily now, but this development is a prerequisite to the colossal sales growth management are targeting going forward.
The ease of the customer journey is key to online shopping, so the release of apps tailored for the US and Australia, coupled with the improvements to existing apps, increases accessibility to the company’s products worldwide. Apps for France, Germany, Italy and Russia are also on the way!
Doing all the right things!
ASOS wants to be the ‘world’s leading fashion destination for 20-somethings’ and the investment thesis for the company is built on this being achievable. Management need to be ambitious, and I’d prefer over-investment in the future than a team that prioritised massaging quarterly figures. Market sentiment always fluctuates, and with this strategy I’m sure ASOS will be back in fashion soon, so it seems a good time to add it to your portfolio while it is still in the bargain bin!
