ASOS: Online Fashion Retailer Analysis

This document provides an analysis of ASOS, the largest online fashion retailer, including key financial results, growth opportunities, and market share. It discusses ASOS's constant growth, investment in IT, and international expansion. The document also includes important metrics and financial ratios for ASOS, as well as a comparison with its competitor Boohoo. It concludes with a recommendation for potential investors.

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1)
ASOS is an online fashion retailer founded in 2000 in U.K. It operates in more
than 200 countries. The company targets young adults in Clothing and beauty
sectors. It offers wide range across women's wear, men’s wear, footwear,
accessories, skin care and beauty products. The company sells a variety of
brands including its own labels ASOS DESIGN, ASOS EDITION, ASOS
WHITE and ASOS 4505. It sells approximately 85,000 products via different
platforms: Mobile app and Web portal from its fulfilment centres spread over
the world in UK, US and Europe. It has country-specific Websites in Australia,
France, Germany, Italy, Spain, Russia and the Unites States. The company
has been investing hugely in IT sector so as to target the tech savvy
generation. To cater to the needs of its customers throughout the world its
website is available in eight languages and it provides number of payment
methods and efficient shipping services. (Asosplc, 2019).
Key Financial Results (Asosplc, 2018):
Key Metrics (2018) Results Year on year increase
Retail sales. £2355.2 million 26%
Total orders placed. 63.2 million 27%
Active customers. 18.4 million 19%
Retail gross margin. £1,237.1 million 130bps
ASOS is UK's largest online fashion retailer and as represented by the above
metrics, the company is on the path of constant growth. 2018 was the third
consecutive financial year where the company’s year on year sales growth
was more than 20%. The company has lot of growth opportunities due to
increasing trend towards online shopping, increasing mobile penetration and

lowering costs of mobile data. Market share of ASOS is continuously
increasing and it is moving towards its goal of becoming “the world’s number
one destination for fashion loving 20-somethings” (Asosplc, 2018).

2)
According to Asosplc, 2018 data:
Current Year
31 August
2018
Previous Year 31
August 2017
% Movement
Revenue (£m) 2,417.3 1,923.6 25.67%
Gross profit (£m) 1,237.1 958.3 29.09%
Operating profit / loss
(£m)
101.9 79.6 28.01%
Total Capital employed
(£m) = Total
Assets(noncurrent assets
+ current assets) –
Current Liabilities
503.4 +
503.6 - 558 =
449
325.9 + 514.5 - 544.2
= 296.2
51.59%
Net cash generated /
used in operating
activities
93.9 145.9 -35.64%
Number of employees 4,386 3,579 22.55%
Basic Earnings per
share(pence)
98.9 77.2 28.11%
Total dividend paid per
ordinary share
N/A N/A N/A
Year-end share price (£)
(According to company
financial year-end: 31
August 2018)
61.14 56.67 7.89%
Year-end market
capitalisation (£m)
(According to company
financial year-end: 31
August 2018) =
Outstanding shares x
Share price
83 million
shares x
£61.14 =
5,074.62
83 million shares x
£56.67 = 4,703.61
7.89%

3)
According to Asosplc, 2018 data:
Ratios Results
2018 2017
Gross Margin = Gross Profit/Revenue 1,237.1 / 2,417.3 =
51.18%
958.3 / 1,923.6 =
49.82%
Operating or EBIT(Earnings before
interest and taxes) Margin = Operating
Profit/Revenue
101.9 / 2,417.3 =
4.21%
79.6 / 1,923.6 =
4.14%
Return on Equity = Net Profit/Total Equity 82.4 / 438.8 =
18.78 %
64.1 / 287.1 =
22.33%
Return on Capital Employed = Operating
Profit/Total Capital Employed
(Total Capital employed = Total Assets –
Current Liabilities)
(Total Assets = Noncurrent Assets +
Current Assets)
101.9 / 449 =
22.69%
(Total Capital
employed = 503.4
+ 503.6 - 558 =
449£m )
79.6 / 296.2 =
26.87%
(Total Capital
employed = 325.9
+ 514.5 - 544.2 =
296.2£m )
Return on Assets = Net Profit/Total
Assets
(Total Assets = Noncurrent Assets +
Current Assets)
82.4 / 1007 =
8.18%
(Total Assets =
503.4 +
503.6=1,007£m)
64.1 / 840.4 =
7.63%
(Total Assets
325.9 +
514.5=840.4£m)

4)
P/E ratio for ASOS for financial year end 31 August 2018
(Londonstockexchange, n.d.) = 61.14/0.989 = 61.82.
Another company in a same industry sector – Boohoo.
P/E ratio for Boohoo on 31 August 2018 (Londonstockexchange,
YahooFinance, n.d.) = 1.77 /0.029 = 61.03
Both ASOS and Boohoo are growth stocks and they have high P/E ratios. The
investors believe that these stocks have great growth prospects because of
increasing trend towards the online shopping and their international reach.
ASOS share price at Boohoo 31 August 2018 PE = 61.03 x 0.989 = £60.36
PE ratio of Boohoo on 31 August 2018 was in the same ballpark as of ASOS
but slightly lower at 61.03. That means the investors were paying little less for
each pound of its earnings as compared to ASOS. So, multiplying the ASOS
31 August 2018 earnings per share with Boohoo PE ratio, share price would
be £60.36 compared to actual share price of £61.14.

5)
8/31/2017
9/17/2017
10/4/2017
10/21/2017
11/7/2017
11/24/2017
12/11/2017
12/28/2017
1/14/2018
1/31/2018
2/17/2018
3/6/2018
3/23/2018
4/9/2018
4/26/2018
5/13/2018
5/30/2018
6/16/2018
7/3/2018
7/20/2018
8/6/2018
8/23/2018
5400
5900
6400
6900
7400
7900
Series 1
Series 1
Figure 1: 1-year graph of daily stock price (pence) movement of ASOS till 31 August
2018 (Data: YahooFinance, n.d.)
Figure 2: 1-year graph of daily price movement (GBP) of FTSE AIM index till 31
August 2018 (Graph: YahooFinance, n.d.)
In the case of ASOS stock price graph chart there was a divergence from the
path of the index from May 2018 to August 2018 as the ASOS stock price was
in a down trend but the FTSE AIM index was in an uptrend. According to the

BBC News, 2018 ASOS shares fallen during that time as the company
announced that its sales growth that year would be around the lower end of
their earlier forecasts. Investors considered it as a growth company and
ASOS stock rose significantly from 2001 level when it was first listed because
the company had seen rapid growth in terms of market share and overtook
the traditional retailers. This latest news development regarding the lower
sales growth expectation dented the investor’s expectations and the stock
took a hit. Another reason for this down trend was investor’s reaction to the
company’s decision of materially increasing its spending on its operations to
support its international expansion as it was expected that this decision will
led to negative free cash flows for that year (sharesmagazine, 2018).

6)
Introduction: ASOS is an online fashion retailer founded in 2000 in U.K. It
operates in more than 200 countries. The company targets young adults in
Clothing and beauty sectors. It offers wide range across women's wear, men’s
wear, footwear, accessories, skin care and beauty products.
Analysis of ASOS over the trading period 1 September 2018 to 30
November 2018:
Figure 3: The details of first three months trading period of 2019 financial
year (asosplc.com, 2018).
Important metrics and financial ratios for this trading period-
Gross margin ratio: -160bps.
Growth in number of orders placed: +16% year on year basis.
Growth in total revenue: +14% year on year basis.
Growth in average selling price (ASP): -6%.
Revised estimates for the current financial year 2019-
Expected growth in total revenues: +15% (previous estimate +20 to 25%).
Expected gross margin ratio: -150bps (previous estimate was positive).
Expected EBIT margin: 2% (previous estimate 4%)

Expected capital expenditure reduced to £200 million
Major metrics and financial ratios for ASOS were downgraded due to its poor
performance in November 2018 otherwise an important month for retailers.
This trading period noticed the weakest growth in online clothing sales in
recent times. All this led to the lowered expectations for all the financials for
the current financial year.
The consumer confidence is weakening and it is affecting the whole online
retail sectors so the company’s expected growth in total revenues is expected
to be +15% as compared to the previous estimates of + 20 to 25%.
Overall things are looking gloomy for the ASOS as well as the whole online
retail market because there has been increased discounting and promotional
activities across the sector. Due to this increased discounting, the expected
growth in company’s average selling price is expected to be -6% as company
has to provide high discount so as to not lose its market share to the
competitors. The promotional activities will result in high variable costs and
also there are high outflows of funds due to the on-going heavy transition
costs. As a result the company’s net profits will be affected negatively. The
current forecast for the earnings is more than 50% less than the previous
estimates and its expected growth in operating margin is now 2% compared
to the previous estimates of 4%. Another major issue with ASOS is that its
cash flows are expected to remain negative for the current year that has
further dented the investor’s mood.
There is a reduction in the expected capital expenditures that can hamper the
company’s growth scenarios as this will lead to a delay in improvements in its
operations related to shipping methods, warehouses which will be negative for
its global expansion goals.
These negative prospects has resulted in a decline in its share price which
has led its PE to fall below 30x from the high levels that is in the range of 70x
seen earlier in 2018. But its major competitor Boohoo has PE above 50x, also
Boohoo has announced that its trading performance is expected to remain
strong in the current financial year without getting affected by an weakness in

the sector. So, this is another worrying aspect as it shows that the current
decline in ASOS’s performance is company specific and therefore it is
expected to trouble the company even in the coming times.
ASO has increased its borrowing facility to £150 million so it has adequate
liquidity in the short term. But, the thing to consider is that the company is
expected to have net debt on its balance sheet in coming years where as it
started with the net positive cash balance few years ago. So, there can be
situations which can result in liquidity problems if things don’t get better
otherwise the company will have to reduce its future growth ambitions.
Recommendation: Considering the current performance and future
expectations it is not advised to invest in ASOS for the recent times till there is
improvement in its performance.

References:
Asosplc. (2019). The ASOS Story. Retrieved from:
https://www.asosplc.com/asos-story
Accessed: 20 March 2019
Asosplc. (2018). 2018-year-in-review. Retrieved from:
https://www.asosplc.com/investors/2018-year-in-review
Accessed: 20 March 2019
Asosplc. (2018). Final Results for the year to 31 August 2018. Retrieved from:
https://www.asosplc.com/~/media/Files/A/Asos-V2/results-archive/
statement/full-year-results-2018.pdf
Accessed: 20 March 2019
Asosplc. (2018). Asosolc Trading Update. Retrieved from:
https://www.asosplc.com/~/media/Files/A/Asos-V2/reports-and-
presentations/asos-trading-update-dec18-final.pdf
Accessed: 20 March 2019
BBC News. (12 July 2018). Asos shares hit by sales warning. Retrieved from:
https://www.bbc.com/news/newsbeat-44805557
Accessed: 20 March 2019
Londonstockexchange. (n.d.). ASC Fundamentals. Retrieved from:
https://www.londonstockexchange.com/exchange/prices/stocks/
summary/fundamentals.html?
fourWayKey=GB0030927254GBGBXAMSM Accessed: 20 March 2019
Londonstockexchange. (n.d.). BOO Fundamentals. Retrieved from:

https://www.londonstockexchange.com/exchange/prices/stocks/
summary/fundamentals.html?
fourWayKey=JE00BG6L7297JEGBXAMSM
Accessed: 20 March 2019
Yahoo Finance. (n.d.). ASC Historical Data. Retrieved from:
https://finance.yahoo.com/quote/ASC.L/history?
period1=1504204200&period2=1535740200&interval=1d&filter=history
&frequency=1d
Accessed: 20 March 2019
Yahoo Finance. (n.d.). BOO Historical Data. Retrieved from:
https://finance.yahoo.com/quote/BOO.L/history?
period1=1504204200&period2=1535740200&interval=1d&filter=history
&frequency=1d
Accessed: 20 March 2019
Yahoo Finance. (n.d.). FTSE AIM Chart. Retrieved from:
https://finance.yahoo.com/quote/^FTAI/chart
Accessed: 20 March 2019
Sharesmagazine. (12 July 2018). Why the market has overreacted to ASOS’
latest update. Retrieved from:
https://www.sharesmagazine.co.uk/news/shares/why-the-market-has-
overreacted-to-asos-latest-update
Accessed: 20 March 2019