ASOS' top line impresses, but analysts divided over falling margins

12th Mar 2015 09:57

Analysts generally applauded the building momentum seen at ASOS in the second quarter, though a sharp fall in margins at the online fashion retailer did divide opinion.Markets gave a warm welcome to the trading statement on Thursday, with shares up nearly 17% at 3,832p in morning trade, after retail sales growth picked up to 22% in the three months to 28 February, ahead of 12% in the first quarter and consensus forecasts of 15% growth.However, the company did say that the retail gross margin was down 320 basis points (bps) over the prior year after the roll-out of its "zonal pricing" capability and planned price investments. Zonal pricing allows the group to set localised prices dependent on local conditions, which should give protection to FX movements.N+1 Singer, which rates ASOS as a 'sell', said the top-line acceleration "has come at significant expense in terms of margin investment, with a slightly adverse mix effect too"."Despite an improving top line this needs to be monitored given cost growth. FY15 and FY16 forecasts require improvement in all areas (sales, margin and cost ratios) and at this stage it is too early to predict if these can all be delivered," the broker said.Canaccord Genuity maintained a 'hold' recommendation, but said it was impressed by the update. It said: "Q2 is expected to be the nadir in terms of margin investment following the 170bps fall in Q1. We forecast flat margins in Q3 and a positive movement in Q4 to deliver a c.100bps fall for FY15."Similarly Numis Securities, which reiterated a 'buy' rating, said: "Early reactions to the significant price investments being made have been encouraging and, leaving our forecasts unchanged, we continue to expect growth to accelerate through FY15."Shore Capital doesn't have a rating on the stock, but said that the investment in zonal pricing "is a positive step in the long term". The broker said "Given the significant currency exposure ASOS encounters as a global business, the additional agility zonal pricing gives the company in structuring its pricing proposition for international consumers and we believe this investment will help to support future growth momentum."