With Christmas set to be the worst in living memory, I was unsurprised to read last week that Marks & Spencer had held a ‘20% off everything’ sale. With falling family budgets and flagging sales, it is more vital than ever to tempt bargain-hunters early. Shops left with unsold stock may not be able to shift it later.
ASOS (LSE:ASC), rated a strong BUY by Arbuthnot Securities
Is there any good news for retailers? Well, online clothing seems to be bucking the trend. According to Verdict Research, it will expand at a compound rate of 29% a year until 2012, growing its share of the sector from 4% in 2007 to 10% by 2010. One firm benefiting is fashion house Asos.com (As Seen On Screen). It shifts all its cut-price garments via its website, mainly targeting women aged 16-34. The basic premise is that teenagers who see a article worn by A-list fashion-icons such as Kate Moss one day can quickly buy a replica online. Of late, the group has extended its range. It now offers designer labels, such as Armani and Versace, alongside cheaper copies. It sells around 19,400 products, has 1.9 million registered users, and is the UK’s second-most-visited online fashion store behind Next. It’s set to deliver 2008/9 revenues and underlying EPS of £141m (up 73%) and 12.5p respectively. Not bad given that it only started up in 2000.
So why am I skeptical? First, the shares are rated at around 22 times earnings and nearly 1.5 times sales. For a retailer, that looks unsustainable. Consumer tastes change. Retaining its fashion-conscious customers will become harder as competition hots up. With a recession looming, and sterling’s weakness pushing up import costs from Asia, it’s hard to see future performance justifying this sky-high valuation. Its better-funded rivals are ramping up their own online propositions, which could squeeze Asos’s gross margins of around 45%. The firm has tried to stay one step ahead by developing new offerings, such as a discount range under the ‘Asos.Red’ name. But this also faces serious challenges, especially from the likes of TK Maxx, which has just launched its own low-cost designer-label website.
Execution risk is also growing. The firm is expanding abroad, which has proved a grave-yard for many UK brands. Lastly, as the sector matures, many experts believe that those retailers with both a high street and online presence will do better than ‘pure-play e-tailers’. These large multi-channel (or bricks and clicks) chains benefit from brand recognition, robust delivery and purchasing power, which should give them an advantage. In all, Asos’s toppy rating looks dangerous – especially against the sector average of eight times earnings. I’d advise investors to find their bargains elsewhere.
Recommendation: SELL at 286.25p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.