Investment Highlights
 

1. Substantial client acquisition activities and robust operational performance have led to decent growth momentum in all the key markets.

2. The Group invested more than 600 million pounds to build a platform for growth and capabilities for a leading global retailer.

3. In the last financial year, the business has doubled the facility space, with the opening of the third foremost Fulfilment Centre in Atlanta, US.

4. The automation of the Euro Hub site, outside Berlin, has assisted in increasing the storage and throughput capacities across the estate by over 60 per cent, through quicker and smarter processing.

5. Shares are currently trading near a 52-week low, which makes it an attractive buy.
 

Business Model Overview: ASOS PLC (LON: ASC)

ASOS PLC is the FTSE AIM UK 50 Index listed fashion retailer (United Kingdom-based), operating globally. The product portfolio consists of around 800 brands, catering to about 20.3 million customers globally.

(Source: Company Presentation)

Key Statistics


Strategies to Aspire to be the World’s Number One Fashion Retailer
 

Value Proposition:
 

1. Availability of trending products at a competitive price.

2. Engagement across channels and building inspirational and educational awareness.

3. Sustainably procurement and delivery.

4. Total number of customer fashion can offer digitally.

 

Geographic Span:
 

1. Global offer – Worldwide distribution and enhanced localization.

2. Targeting the United Kingdom and accelerate business in the European Union and the United States.

3. Capturing growth internationally.

 

Winning Strategy:
 

1. An Engaging experience by providing personalized products.

2. User-friendly digital experience.

3. Relentless and consistent customer service.

4. Stock pool virtually.

5. Increasing length and width of the product range.

Capabilities:

1. An Agile model with cost-effectiveness.

2. Improved leadership and capabilities.

3. Fashion DNA and International level technological and logistics experience.
 

(Source: Company Website)

Disruption Through Transformation

During the year 2019, the group has invested around £600m to build a platform for progressive growth and enhanced capabilities:
 

Warehouse transformation across Europe and the United States
 

1. Resolved issues related to automation & mechanization in Euro Hub.

2. Stabilized US hub operations with growth potential.

3. Rebalancing of stock.
 

Focus on core products
 

1. Customer Engagement: Improved velocity and content.

2. Product: Bolstered width and intensified freshness of products (delivering ~5,000 new styles per week).

3. SEO Rankings: Improved ranking globally by leverage technology.

4. People: Optimizing management experience.
 

Overall, the group has built the platform and foundation in FY2019 for priorities of FY2020.


(Source: Company Presentation)

Smart Capital Expenditure Spending Reflects Business Revamping

During 2019, the group’s capex spending indicates:
 

1. Transformation warehouse rollout.

2. Capex to return towards BAU (business as usual) level.

3. Transition to 3 Hubs.

4. Removing non-strategic cost.

 

(Source: Company Presentation)


Top Shareholders



Key Indicators to Track Performance Financially and Strategically

Financial Objectives:Financial measures for the period FY 2019, given in the picture below, signify their overall performance, such as:
 

1. Retail sales surged at 13%.

2. Gross profit soared by 8%.

3. Retail gross margin plunged by 250 bps, and EBIT margin also declined by 290 bps.
 

(Source: Annual Report)
 

Strategic Objectives: Significant growth was observed in nearly all key strategic measures, as shown in the picture below, while some of them are:
 

1. Increased Active customers to 10% to 20.3 million.

2. Orders and visits were both surged by 14%.

3. While Net Promoter Score reduced slightly by four points as against the previous year.

 

(
Source: Annual Report)

Recent Major C-Level Appointments

1. 5^th March 2020: The Fashion retailer ASOS has appointed Jo Butler as Chief People Officer for ensuring strategic capabilities to meet future growth objectives.

2. 25^th November 2019: ASOS has appointed Robert Birge as Chief Growth Officer, with effect from 3^rd December 2019.

3. 17^th April 2019: The group has announced the designation of Chief Financial Officer to Mathew Dunn, came into effect 23^rd April 2019.
 

Tapping the Opportunities of Global Market for Online Fashion

With relentless demand in the past 12 months, the global online fashion market is valued over £220 billion. In the wake of Covid-19 contagion and its subsequent measures related to lockdown can impact the production in short-run, while e-commerce sales have the potential to sustain in such a challenging scenario. However, for sustainable fashion, the key area to focus on is ‘Carbon Emission’, since the fashion industry impacts the environment most, next to the oil industry. As per Vogue Business, the fashion retailers that succeeded in 2019, had invested in logistics, supply chain and delivery capabilities. For future growth, leveraging data capability is imperative to forecast future trends.

Whilst ASOS PLC has reduced 30%, since 2015, in operational carbon emissions per order, which makes them a sustainable brand.  Also, it has been launching 5,000 new styles every week to bolster its imperishable position and making the styles available at competitive pricing. Moreover, it is serving with unique catering and personalized product requirement. It is continuously experimenting with new measures to leverage customer data through machine learning to unlock new opportunities. Furthermore, it has been working with third-party suppliers, enabling them for instant design to delivery capability.

Trading Update Reflecting Sales Growth, Customer Acquisition and Total Active Customers


(Source: Trading Statement, Company Website)

On 23^rd January 2020, the company unveiled the trading update for the four months to 31st December 2019. The progress is evident in both the KPIs and sales growth, with retail sales growth stood at 20% and good performance across all regions. The total group revenue for the four months to 31st December 2019 increased by 20% to £1,106 million as compared with the corresponding period of the last year, driven by good performance across all regions. This also reflects a robust client engagement activity throughout the period and a good sale on Black Friday. The total orders were up by 20 per cent to 27.7 million in the four months to 31st December 2019. This was supported by strong operational performance through the zenith period at all the distribution centres. On a year-on-year basis, the company has robust customer momentum. During the current period, active customers increased to 1.4 million. In the current period, the gross margin decreased by 170bps, due to US duty and investment in client acquisition as planned.

Financial Ratios -  Depicting Resilience Against Peers


(Source: Thomson Reuters)

The reported EBITDA margin in FY19 was 3.9 per cent, an increase from the industry median of 2.3 per cent. Net margin reported was 0.9 per cent for the fiscal year 2019, a decrease from the last year’s data, but remained the same as compared with the industry median. Return on equity for the same period stood at 5.5 per cent, reflecting a significant uptick against its peers. On the liquidity front, ASOS PLC’s current ratio stood at 0.81x. On leverage front, the debt-equity ratio of the ASOS PLC’s was 0.17, which was lower as compared to the industry median of 0.21x, reflecting that the company is less leveraged as compared to its peers.

Share Price Performance


Daily Chart as on 7^th April 2020, before the market closed (Source: Thomson Reuters)

On April 7, 2020, at the time of writing (before the market close, at 10:25 AM GMT), ASOS PLC shares were trading at GBX 1,484.50, up by 27.53 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 4,090.00/GBX 975.20. The group’s stock is reflecting higher volatility as against the benchmark index, based on the company’s beta of 2.13. The outstanding market capitalisation was around £977.28 million.

Bullish Technical Indicators

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further. Also, the 14-Relative Strength Index of the stock is strengthening the upside move.

Valuation Methodology

Method 1: EV/Sales Approach (NTM)



To compare ASOS PLC with its peers, EV/Sales multiple has been used. The peers are Marks and Spencer Group PLC (NTM EV/Sales was 0.61), Kingfisher PLC (NTM EV/Sales was 0.50), Dixons Carphone PLC (NTM EV/Sales was 0.25), and Superdry PLC (NTM EV/Sales was 0.54). The average of EV/Sales (NTM) of the company’s peers was 0.48x (approx.)

Method 2: Price to Cash Flow Approach (NTM)



To compare ASOS PLC with its peers, Price/Cash Flow multiple has been used. The peers are Next PLC (NTM Price/Cash Flow was 8.58), Boohoo Group PLC (NTM Price/Cash Flow was 10.20), Associated British Foods PLC (NTM Price/Cash Flow was 10.56), and Marks and Spencer Group PLC (NTM Price/Cash Flow was 2.58). The Median of Price/Cash Flow (NTM) of the company’s peers was 9.39x (approx.)

Valuation Metrics

 
(Source: LSE)

As on 28th February 2020, the company’s Price/Sales multiple is 0.9x, which was fairly valued as compared with the industry.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

Risk Assessment

The market will remain challenging as customers make a fundamental shift towards the online marketplace. Though the company has acknowledged the challenge, the evolution would not be easy nor without cost. Moreover, the push towards online sales has meant that variable costs, such as warehouse picking and delivery costs, has increased. In the near future, the company will be faced with uncertainty, due to increased saturation of the 20-something e-commerce market and the increased aggressiveness of the competitors actions. The company’s operations are impacted negatively due to uncertainty created by the Brexit. In the near term, business operations may be impacted due to COVID-19 Pandemic uncertainty and lockdowns in many areas.

Growth Catalysts

The company is confident of its ability to restore profitability and accelerate free cash flow generation, while continuing to capture market share. As the online apparel market continues to grow unabated, with the global online fashion a £220bn+ market, considerable growth opportunities can be seen in key markets. With the advanced usage of the technology platform and infrastructure capabilities, the group is well placed to capitalise on the shifts in customer behaviour. The financial year 2020 has begun in line with the company’s expectations.

Business Outlook Scenario

The company’s business model is quite sustainable, with a proven track record of decent growth trajectory and strategic opportunities in the pipeline.Strong client acquisition activity backed by healthy operational and financial performance will offer exciting opportunities to exploit and scale up the business operations in future. The focus for 2020 is to leverage the investments further and enhance the capabilities. The group has already invested more than £600 million to build a platform. The company has a strong balance sheet with minimum net debt, which positions it well for sustainable growth positioning in the near term.

Over the course of 4 years (FY15 - FY19), the company’s revenue surged from GBP 1,150.79 million in FY15 to GBP 2,733.50 million in FY2019. Compounded annual growth rate (CAGR) stood at 24.15%.

Based on the decent fundamental prospects and support from valuation done using the above two methods, we have given a “Speculative Buy” recommendation at the closing price of GBX 1,164 (as on 6^th April 2020), with lower double-digit upside potential, based on 0.48x NTM EV/Sales (approx.) on FY20E sales (approx.) and 9.39x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.
* The “Speculative Buy” recommendation is also valid for the current price as covered in the report as on 7th April 2020.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.