The high street had an awful Christmas, with the likes of Dixons, Land of Leather and even Marks & Spencer suffering as consumers tightened their belts. But there was one bright spot: internet sales. According to Capgemini, online shopping hit an all-time peak with £15.2bn purchased in the final quarter of 2007, up from £9.6bn a year earlier, with clothing and electronics doing well. As such, for the full year UK online revenues rose 54% to £46.6bn in 2007 from £30.2bn in 2006, and now equates to one pound in every seven spent on consumer goods. This trend has been admirably exploited by one online fashion house in particular, but its glory days now look to be over.
Asos (ASC), rated a BUY by Daniel Stewart
Asos.com (an acronym for As Seen On Screen) has harnessed the nation’s obsession with celebrities. Its turnover in the seven weeks to 20 January soared by 86%. CEO Nick Robertson said: “We had a cracking Christmas. Sales were ahead of forecasts, and margins remained strong.”
Asos’ original strategy was to sell cheap versions of clothes worn by celebrities to women aged 16 to 34. The idea was that teenagers could see a picture of Kylie in a magazine and then buy a replica outfit from Asos. However, the company now offers a much wider range, with premium brands and accessories from labels such as Chloé, Miu Miu and Gucci. It has also pushed into specialist niches, such as maternity wear, petite and plus sizes, as well as menswear. Asos is also riding the social networking boom, with the likes of Facebook and MySpace its biggest source of online traffic. As such, the firm now offers around 6,500 products from 135 designer brands, has 1.7 million registered users, and is the second-most visited online fashion store in the UK, behind Next. Not too shabby, considering the firm only started up seven years ago.
So why am I sceptical? Well, the shares are valued at around 39 times 2007/2008 earnings and over two times revenues, which is simply too rich for a retailer (even a good one). Yes, the business is doing well, but consumer tastes change. Retaining its fashion-conscious customers will get harder in a fiercely competitive environment where disposable incomes are shrinking. And its better-funded rivals will undoubtedly ramp up their own sites and squeeze Asos’s plump gross margins of around 45%. As the sector matures, many experts believe that those retailers who have both a high street and an online presence (such as Tesco and John Lewis) will do better than “pure-play e-tailers”. These large multi-channel (‘bricks and clicks’) chains have the benefits of brand recognition, robust delivery and buying power, which should give them an advantage.
With Asos’s shares having near-doubled since September, to trade at a hefty premium to the sector average of 10 times earnings, it’s time to bank profits. Some bullish analysts argue that Asos’s business model may even be recession proof – a certain warning of “irrational optimism”.
Recommendation: TAKE PROFITS at 233p (market cap £170m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments