N+1 Singer keeps holding Asos as model for growth

18th Mar 2014 14:11

While numbers were worse than expected, the trading update from Asos proved the robustness of its strategy, said broker N+1 Singer as it reiterated its 'hold' recommendation.The trading update in the two-month period highlighted two key things, according to analyst Matthew McEachran. Firstly, the continuing strong growth in some overseas regions and also the UK, albeit slightly softer than hoped, "confirms the strength of the model". The second point is that as ASOS internationalises overseas currency fluctuations become increasingly relevant, with the recent appreciation of sterling hitting sales in several markets. Forex cost Asos a large portion of its growth in its nascent Rest of World (RoW) segment, with the Australian dollar and Russian rouble costing it 12 per cent of growth as RoW sales grew by only 3% (vs +19%) compared to expectations of 24% growth.Other geographies were both slightly better than market expectations with US retail sales up 41% and Europe up 57%. News that warehousing investment has been accelerated in the UK and Germany means additional costs this year, on top of China start-up costs, especially in the first half of the current and next year. "The investment will raise capacity to circa £2.5bn and therefore facilitate the next leg of growth." In the medium term, the net effect of slower RoW revenue and warehousing dual-running and disruption suggested to the broker that full year profit before tax forecasts will reduce by circa £4m and deliver roughly £20m first-half profit, a near-20% year-on-year decline.The analyst said the increased investment "highlights management remains bullish about future growth prospects" and pointed out that FX headwinds should moderate at some point in time. OH