First Burberry, now Asos: weak pound suits British fashion retail well

Business |ANALYSIS

This week, Burberry was not only the only fashion giant profiting from the ailing pound post-Brexit. AIM’s champion Asos has also fulfilled the expectations to post strong full-year figures on Tuesday.

UBS recently upped its price target for the shares from 4,450 pence to 5,500 pence, saying the investment case is “evolving into online fast fashion and away from pure brand aggregation, albeit with a degree of edited range and product selection”. As advanced by ‘The Telegraph’ in its weekend edition, the market was expecting Asos to announce pre-tax profits of 62.2 million pounds on sales of 1.44 billion.

Sales will increase by 20 percent to 25 percent in its 2017 financial year, the London-based company in a statement Tuesday. That implies a slowdown at constant currency rates, according to Michelle Wilson, an analyst at Berenberg.

“Much of this expansion is now priced in and, given the investment made in the globalisation of the business, is not without risk," Wilson said by e-mail.

Analysts at Shore Capital had higher expectations for the fashion e-tailer, foreseeing a pre-tax profit of 63.1 million pounds, after re-evaluating its expectations over the last two months of the retailer’s financial year, highlights ‘Proactive Investors’.

“On a reported basis we expect to see an acceleration in sales in the US and EU, with currency tailwinds supporting top-line momentum. We have been bullish about the prospects of the business in the former; we view the online fast fashion market in the US as underdeveloped compared with the domestic UK market, thus representing an opportunity for those businesses with a compelling proposition such as ASOS and Boohoo,” the broker said.

David Cheetham from XTB pointed out Tuesday how “The final results for the year from Asos are impressive overall and contain many highlights for investors. A 26 percent increase in group revenue shows that the retailer's ambitious expansion plans are clearly working as the firm seeks to gain market share in the US as well as its core European operations - this can be clearly seen by a 50 percent increase in US sales alongside growth of 27 percent and 28 percent in the UK and EU respectively.”

“Investors will likely greet this latest release warmly after enjoying a stellar return from this stock over the past 12 months with the price appreciating more than 75 percent,” adds Cheetham who thinks that “This morning's release will go some way to reaffirm this view and investors can look forward in the hope of further gains in the future.”

It’s noteworthy that ASOS released its full-year results on the same day the Office for National Statistics reported a 1 percent year-on-year rise in UK inflation in September, largely as a result of higher clothes and oil prices, highlights ‘Proactive Investor’. However, the fashion company’s CEO said the company was still focused on keeping prices competitive - especially for international customers - which helps explain the 30 basis point drop in retail gross margins.

Excluding the 20.9 million pounds one-off charge relating to a legal settlement over trademark infringement to cycle wear manufacturer Assos of Switzerland and German menswear retailer Anson's Herrenhaus in September, ASOS’ pre-tax profits actually soared 37 percent to 63.7 million pounds. The group has noticeably adjusted its figures to account for its discontinued operations in China, which incurred one-off closure costs of 6.5 million pound, stresses ‘Proactive Investor’.

Analysts following the stock agree, that other than this unfortunate dent, there really isn't a lot to fault. Retail sales grew 26 percent, with strong performances across all major markets, including the UK (up 27 per cent), the US (up 50 per cent) and the EU (up 28 per cent).

Based on the figures released by the company on Tuesday, Broker Peel Hunt expects pre-tax profits of 80.4 million pounds for the year ending August 2017, giving EPS of 76.5 pence, well ahead of last year’s same period’s 63.7 million pounds and 61.8 pence earnings per share in FY2016.

On the wake of the news, Asos Plc shares fell the most in the past four months as the sales growth forecast from the UK’s largest online-only fashion retailer disappointed investors.

First Burberry, now Asos: weak pound suits British fashion retail well

In Brief:

Profit

Turnover

Traffic

Stock price