Can ASOS regain lost ground on Boohoo?
ASOS is hoping to show that it has bounced back when it releases its first set of results of the new financial year, but will it be able to draw attention away from its larger rival Boohoo?
When is ASOS’s earnings date?
ASOS, the AIM-listed online clothing retailer, will report results for the four months to the end of December 2019 on Thursday, 23 January 2020, at 7 AM GMT. This will be the first update of the new financial year since it released its annual results for the 12 months to the end of August 2019.
ASOS earnings preview: what does the City expect?
Investors are hoping ASOS will bounce back when it releases its first set of results for the new financial year after releasing ‘disappointing’ annual earnings last October. ASOS has been investing heavily to scale up the business and expand its European and US operations, but admitted this was ‘more challenging’ and ‘more disruptive than we originally anticipated’.
The significant cost and complexity of its plans filtered through to its annual results, when pre-tax profit plunged 68% to £33.1 million from £102 million, and it ended August with £90.5 million worth of net debt compared to over £42 million of net cash the year before. Sales grew in every geographic region to push overall revenue up by 13%, helped by a 10% lift in the number of customers. However, the value of goods being bought by each customer dipped and margins contracted.
This has weighed on ASOS shares over the past year. The stock has failed to fully recover from a sharp fall experienced in December 2018, when it made the first of several reductions to its guidance. In fact, it has struggled to stick to its guidance so much that the company’s new finance director, Mathew Dunn, has said ASOS will no longer issue a ‘narrow rigid guidance’ and will have targets focused on free cash flow rather than sales and margins.
But ASOS is now hoping to start reaping the rewards of its investment, which should pave the way for better results in the year to the end of August 2020. The company said it has ‘identified the root causes’ of its operational issues and has already started to resolve the problems, and that capital expenditure will fall back to ‘normal levels’ after three years of intense spending.
‘Having invested heavily into the platform and foundations of the business over the last few years, both in terms of physical infrastructure and technology, our focus now shifts to enhancing the capabilities needed to ensure we leverage these investments. With the current investment in the global platform largely complete, this year represents the end of a period of elevated capital spend which we expect to fall towards more normal levels going forward,’ said chief executive Nick Beighton last October.
Notably, this week’s set of results will cover the all-important ‘golden quarter’ for retailers that includes Black Friday and Christmas. ASOS had a torrid time in 2018, when it refrained from dropping prices as much as it had in the past, causing it to lose custom, but has said it was in a much better position to capitalise in 2019. That could give its results a boost considering they will be coming up against weak comparables for the year before.
ASOS shares chase upside after a tough year
ASOS believes it is over the worst of its problems and should begin to see the benefits of its investments and expansion. Spending has past its peak and there is a greater focus on cash flow, and analysts are expecting the company to deliver better results in the 2020 financial year.
The table below is what analysts expect ASOS to deliver in the year to the end of August 2020 compared to what it delivered in its last set of annual results.
|FY2019 results||FY2020 consensus|
|Sales||£2.73 billion||£3.11 billion|
|Pre-tax profit||£33.1 million||£33.1 million|
|Earnings per share (EPS)||29.4p||51.9p|
|Capex||£221.6 million||£154 million|
|Net debt||£90.5 million||£79 million|
Source: ASOS-compiled consensus, last updated 7 January 2020
But should investors consider Boohoo instead?
ASOS was the most valuable stock listed on AIM before shares took a considerable knock in December 2018. Today, it has lost that crown and that is significant considering it sits in second place behind its biggest rival, Boohoo.
While ASOS shares are trading a smidgen higher than a year ago, Boohoo shares have rallied to hit a fresh all-time high.
It has been well-deserved, with Boohoo having delivered impressive growth. Like ASOS, Boohoo has also been expanding its international presence, but it has delivered it in a much smoother fashion. Revenue jumped 43% in the six months to the end of August 2019 and pre-tax profit jumped 45%, while superior cash flow also left it with over £207 million of net cash. Plus, while ASOS has had to lower guidance over the past year, Boohoo has been raising it. Last week, Boohoo said revenue for the year to the end of February 2020 will be 40% to 42% ahead of the previous year, up from a previous forecast of 33%-38%. It also said its adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) margin should be between 10%-10.2%, instead of its previous 10% estimate.
Boohoo has already provided an insight into the all-important trading period in the final months of 2019, which has set a high standard for ASOS to follow. Boohoo’s revenue grew 44% in the four months to the end of December, comprised of a 42% rise in the UK, 54% in the EU and 57% in the US. With ASOS still in recovery mode, it is unlikely the company will be able to match those figures when it releases its results later this week that cover the same period.
Boohoo’s next scheduled update will see it release its annual results for the year to the end of February 2020 on 22 April 2020.
How to trade the ASOS results
There are 13 brokers covering ASOS and, overall, the stock boasts an average rating of Hold (as of 20 January 2020). Still, the average target price sits at £35.61, suggesting there is 15% upside to the current share price of £30.90.
Boohoo has a stronger average broker rating (Buy). Although, with an average target price of £34.62, brokers also believe there is less potential upside to the stock.
|Average target price||£35.61||£34.62|
|Current price (20 January 2020)||£30.90||£32.70|
ASOS vs Boohoo: which one should you buy?
Investors should be bullish about both stocks for different reasons. ASOS has had a tough year but looks to have overcome most of its problems, leaving it with a strong foundation to build upon. Shares remain subdued, but this means there is more upside to ASOS shares that should be set to recover in 2020, even it fails to match the pace of growth being delivered by Boohoo.
Boohoo is a safer bet for investors, but one that could offer limited upside compared to ASOS if it delivers a turnaround. It has been smoother sailing for Boohoo and its track record is sound, which should install greater confidence in anyone looking for a longer-term investment. Plus, it also has a slew of newer brands it has acquired - Coast, Karen Millen and MissPap - that give it further growth avenues going forward. Brokers still see room for the share price to head higher even after hitting a record high, albeit not by that much.
There is a third option for investors keen to gain exposure to the fashion retail segment. JD Sports, the athleisure and footwear retailer, has over 2400 stores worldwide and it has consistently bucked the downward trend hitting the wider market. Its revenue is growing faster than even that of Boohoo, and the company is more profitable at the bottom line. Plus, it pays dividends too, which is always welcomed by investors.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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