Last week, veteran retailer and Carpetright CEO Lord Harris warned that Britain is about to enter a double-dip recession, triggered by tax hikes, spiralling unemployment, rising inflation and even higher borrowing costs as the Greek crisis reverberates across the world’s sovereign debt markets.
One area bucking the trend is internet shopping, which is expanding at about 15% a year and has increased its share of the total retail sector from 4% in 2007 to 10% in 2010. Asos.com (an acronym for As Seen On Screen) is riding this rise. It doesn’t own any high-street stores. Instead, the firm sells cheap copies (from Ugg boots to floor-length maxi dresses) of clothes worn by A-list celebrities directly from its website, mainly targeting women aged 16 to 34. So teenagers, for example, can see a celebrity sporting an outfit one day and buy it the next.
Since 2008 the company has extended its range enormously and now offers designer labels, such as Armani and Versace, alongside its traditional merchandise. Asos.com now sells 35,000 products, has 1.6 million active users, and is ranked the second-most visited fashion website in Britain behind Next. Pretty impressive stuff, given the firm only started up in 2000. It’s set to deliver revenue and underlying earnings per share of £223m (up 35%) and 18.2p respectively for the year ending March 2010.
ASOS (LSE: ASC), rated a BUY by Société Générale
So why am I sceptical? Well, firstly, the shares are rated at around 33 times 2010 earnings and two times turnover. For a retailer (albeit a good one), that’s valuation madness. Yes, the business is going gangbusters, but consumer tastes change, and retaining the loyalty of fickle customers will become harder in a fiercely competitive environment. What’s more, with another economic slump looming and sterling’s weakness pushing up import costs, it’s hard to see future performance justifying this stratospheric rating. Meanwhile, its better-funded rivals (think John Lewis and M&S) are ramping up their own online propositions, which could squeeze Asos’s gross margins of 42%.
The company is now being forced to expand abroad to compensate for its slowing domestic division (72% of sales). But this strategy has been a graveyard for many brands. Finally, as the sector matures, many experts believe that the retailers who have both a high-street and an online presence will do better than the ‘pure-play e-tailers’. These large, multi-channel (or ‘bricks and clicks’) chains, such as Tesco, enjoy the benefits of brand recognition, plus robust delivery and purchasing power. That combination should give them the edge.
In summary, despite the remote chance of a takeover bid (perhaps from Amazon or Primark), Asos’s toppy valuation looks vulnerable to a sharp pullback. Preliminary results are due on 9 June.
Recommendation: SELL at 605p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments