The trading performance of Britain’s top retailers during the Christmas period has been patchy to say the least. While revenuess at Thorntons underwhelmed during the festive period, and poor footfall at Bank Fashion forced the business into administration, Ted Baker saw underlying sales leap an impressive 13.5% over the holidays.
Still, I believe that ASOS’ (LSE: ASOS) online-only proposition could deliver blockbusting results for Christmas. Indeed, the collapse of Argos and Tesco’s websites under heavy web traffic underlined the galloping importance of e-commerce. And as broker Investec points out,
“2014 was a truly multi-channel Christmas. Those with the best service and most efficient delivery propositions tended to outperform [and] this was seen in the John Lewis, House of Fraser and NEXT updates.”
And with falling food prices and cheaper petrol giving shoppers more money to spend on togs, ASOS could be one of the market’s outstanding performers.
UK infrastructure improvements in place
All is not perfect in the garden, however, and eagle-eyed investors will be checking in on whether ASOS has managed to stabilise margins, no mean feat given the rounds of discounting being wheeled out across Britain’s clothing specialists. Indeed, ASOS announced in December that gross margins fell 170 basis points during September-December.
ASOS is targeting a 100 basis point contraction for the full year concluding August 2015, as improvements in warehousing and distribution begin to pay off. And with upgrades to its Barnsley facility having been completed during the autumn, this heavy lifting could provide an extra fillip to ASOS’ seasonal results.
On top of this, ASOS could also ride the wave seen at Associated British Food’s Primark budget clothing division in recent times, and the New Look and Monki labels could continue to strike a chord with price-conscious shoppers.
Indeed, ASOS’ announcement last month that group sales growth has gathered momentum since October, culminating in its best ever trading week in November — despite the aforementioned competitive pressures — bode extremely well for tomorrow’s update.
A premier long-term pick
At first glance ASOS may be deemed poor value given its near-term earnings prospects. Indeed, the effect of significant restructuring at the firm is anticipated to push earnings 6% lower in 2015, in turn creating a gigantic P/E multiple of 60.4 times, according to City analysts.
Although the likelihood of more red ink is hardly cause to break out the bubbly, this year’s expected performance illustrates the steady improvement made at the firm following dips of 51% and 11% in fiscal 2013 and 2014 correspondingly.
Indeed, this work is finally expected to push ASOS back into the black in 2016, with a 28% bottom line advance pencilled in for the period. The share price still remains elevated at 47.5 times for this period, however, soaring above the watermark of 15 which represents decent value for money.
But I believe that ASOS’ strong position in the hotbed of online commerce, combined with heavy investment in distribution in Europe and the US and the rollout of ‘zonal pricing’ in key territories, merits this premium rating, and I fully expect earnings to continue heading northwards.
