Company Reports

We are maintaining our fair value estimate for no-moat Asos following the group's decision to offload a majority stake in the Topshop and Topman brands, which we take positively. The shares remain deeply undervalued, trading at 0.3 times forward revenue and 7 times EBITDA.

We are maintaining our fair value estimate for no-moat Asos as the company reported a decline in sales in the first half of the year but some progress on clearing out stock, improving speed to market and cost control, which should be beneficial for growth going forward. Trading at 13 times forward earnings, the shares look attractive.

We are reducing our fair value estimate for no-moat ASOS from GBX 1910 to GBX 1330 as the company reported worsening trading conditions in the second half of the year and guided for further negative sales development in 2024. We still believe there is value in ASOS' shares despite very high uncertainty. Those are trading at around 0.2 times revenue, implying continued erosion in revenue and profitability. That said, Zalando remains our preferred name in European online apparel space on bigger scale and stronger financials.

Asos is a leading European e-commerce player in fashion and cosmetics focusing on the 20-something-year-old demographic segment. It offers more than 85,000 products on its website from its own label third-party brand partners. We believe that through its wide reach (over 26 million active users globally with over 12% of population reach in its home United Kingdom market), Asos benefits from traces of network, cost, and intangible asset advantages. Although we don’t believe those advantages are strong enough to warrant a moat, we expect the network effect and intangible asset advantages to strengthen over time as more customer traffic data is accumulated and better analytics allow improve conversion rates and customer loyalty; thus we grant Asos a positive moat trend rating.

Asos is a leading European e-commerce player in fashion and cosmetics focusing on the 20-something-year-old demographic segment. It offers more than 85,000 products on its website from its own label third-party brand partners. We believe that through its wide reach (over 26 million active users globally with over 12% of population reach in its home United Kingdom market), Asos benefits from traces of network, cost, and intangible asset advantages. Although we don’t believe those advantages are strong enough to warrant a moat, we expect the network effect and intangible asset advantages to strengthen over time as more customer traffic data is accumulated and better analytics allow improve conversion rates and customer loyalty; thus we grant Asos a positive moat trend rating.

We expect to lower our fair value estimate for no-moat Asos by a low-teens percentage as the company reported disappointing revenue and profits for the first half of the fiscal year ending in August 2023. We still view shares as cheap at current levels.

We are maintaining our fair value estimate for no-moat ASOS as it reported (as anticipated) weak sales figures for four months to Dec. 31. We still expect ASOS to grow at a low-double-digit pace over the next 10 years as we see underlying growth drivers of online apparel intact. However, the slower pace of the firm’s investment in customer value proposition and challenging macro conditions would make this growth more back-end loaded. Shares are still very cheap, trading in deep 5-star territory.

We are reducing our fair value estimate for ASOS to GBX 3,360 from GBX 4,110 to account for worse-than-expected current-year results and slower expected growth in 2023 largely as a result of more challenging macro conditions in the company’s main markets. We still expect ASOS to grow at a low-double-digit pace over the next 10 years as we see underlying growth drivers of online apparel intact. However, the slower pace of the firm’s investment in customer proposition (capital expenditure plans reduced by GBP 25 million-GBP 50 million in 2023) and challenging macro conditions would make this growth more back-end loaded. Shares are still very cheap, trading in deep 5-star territory.

Asos is a leading European e-commerce player in fashion and cosmetics focusing on the 20-something-year-old demographic segment. It offers more than 85,000 products on its website from its own label and around 950 third-party brand partners. We believe that through its wide reach (over 26 million active users globally with over 12% of population reach in its home United Kingdom market), Asos benefits from traces of network, cost, and intangible asset advantages. Although we don’t believe those advantages are strong enough to warrant a moat, we expect the network effect and intangible asset advantages to strengthen over time as more customer traffic data is accumulated and better analytics allow improve conversion rates and customer loyalty; thus we grant Asos a positive moat trend rating.

We reduce our fair value estimate for no-moat Asos to GBX 4,110 from GBX 4,410 after it issued a profit warning, significantly reducing its outlook for revenue and profitability for the year. Asos now expects revenue to be up 4%-7% (versus 10%-15% prior outlook, and 12.9% in our model) and profit before taxes to range between GBP 20 million and GBP 60 million (GBP 110 million and GBP 140 million in prior guidance and GBP 118 in our model). Outlook implies a cash outflow of GBP 275 million to GBP 325 million, resulting in a net debt position from net cash of GBP 199.50 million in 2021. Cash on the balance sheet should still exceed GBP 350 million and we don’t envisage liquidity problems for Asos.

Asos is a leading European e-commerce player in fashion and cosmetics focusing on the 20-something-year-old demographic segment. It offers more than 85,000 products on its website from its own label and around 950 third-party brand partners. We believe that through its wide reach (over 26 million active users globally with over 12% of population reach in its home United Kingdom market), Asos benefits from traces of network, cost, and intangible asset advantages. Although we don’t believe those advantages are strong enough to warrant a moat, we expect the network effect and intangible asset advantages to strengthen over time as more customer traffic data is accumulated and better analytics allow improve conversion rates and customer loyalty; thus we grant Asos a positive moat trend rating.

Concerns about the impact of inflation on consumer spending, rising interest rates, Russia-Ukraine conflict and lockdowns in China have put pressure on shares across our luxury and apparel coverage. We see these changes as either manageable (the sector has limited exposure to Russia and Ukraine) or transitory (Chinese demand recovered quickly after previous lockdowns). Historically, the luxury industry grew prices ahead of the consumer price index and while it was not the case for general apparel the strongest firms, such as narrow-moat Inditex, are well placed to take market share under strenuous conditions (as the coronavirus experience has shown).

We expect to reduce our full-year assumptions for no-moat Asos after the firm reported first-half sales largely in line with management’s guidance, to incorporate the suspension of business in Russia (2% of revenue and GBP 14 million profit before taxes). Although Russia isn't a disproportionately profitable market, the sudden stop to operations led to poor absorption of semifixed costs. This shouldn't have a material effect on our fair value estimate and we view shares as materially undervalued.

We are not making any changes to our fair value estimates for our luxury and apparel coverage list due to Russia-Ukraine armed conflict. The luxury industry’s exposure to the Russia and Ukraine is small, accounting for a low-single-digit percentage of revenue, by our estimates. We believe that the conflict is unlikely to dampen consumer confidence in China (primary long-term growth driver) or the U.S. (driver of growth in recent years). European consumer sentiment (low-20% of industry’s sales) may be affected, should energy-related inflation accelerate meaningfully as a result of conflict; however, Morningstar's view is that the likelihood of gas delivery disruption to Europe from Russia is low. That said, most luxury names in our coverage look expensive to us, and we would recommend investors await a wider margin of error for investment in the sector.

We are maintaining our fair value estimate for no-moat Asos as the company reported four-month sales to Dec. 31 in line with its guidance (up 5% versus mid-single-digit constant currency revenue growth in the first half). The shares look very undervalued at current levels, providing over 70% upside to our fair value estimate. We believe that current supply availability issues are temporary and that the company should still benefit from growth in online apparel consumption in Europe and increased other-market penetration.

Asos is a leading European e-commerce player in fashion and cosmetics focusing on the 20-something-year-old demographic segment. It offers more than 85,000 products on its website from its own label and around 950 third-party brand partners. We believe that through its wide reach (over 26 million active users globally with over 12% of population reach in its home United Kingdom market), Asos benefits from traces of network, cost, and intangible asset advantages. Although we don’t believe those advantages are strong enough to warrant a moat, we expect the network effect and intangible asset advantages to strengthen over time as more customer traffic data is accumulated and better analytics allow improve conversion rates and customer loyalty; thus we grant Asos a positive moat trend rating.

We don’t expect to materially change our fair value estimate as Asos delivered weaker revenue but better profitability in fiscal 2021 than we expected and came up with 2022 and midterm targets that are broadly comparable with our forecasts. After losing around one half of value year to date we see shares as attractive, given the still strong potential runway for growth for the business and over 60% upside to our fair value estimate.

We are retaining our fair value estimate of GBX 4,040 for no-moat ASOS after the company reported interim results for the six months to Feb. 28. Revenue was up 24% (25% in constant currency) for the first half, which compares with just over 25% we forecast for the full year. Profitability improved significantly as adjusted EBIT margin reached 5.9% from 2.2% a year ago, with continued benefits from a COVID-19-related category mix shift (towards casualwear, activewear, and beauty and away from tailoring and occasionwear) prompting lower returns in the net amount of GBP 48.5 million (42% of adjusted EBIT). Even excluding the positive COVID-19 impact, adjusted EBIT almost doubled from the previous year’s level. We forecast 5%-6% sustainable operating margin for ASOS versus 3.7% on average over the past five years as the business scales.

We are increasing out fair value estimate for no-moat Asos to GBX 4,040 from GBX 3,430 as we roll out our model and incorporate the announced acquisition of Arcadia's brands--Topshop, Topman, Miss Selfridges and HIIT for GBP 265 million (own cash-financed, without additional liquidity). We expect revenue to grow by 12% annually over the next 10 years (excluding Arcadia brands) and operating margin to increase to 6%, from 4.6% in 2020 (positively impacted by COVID-19 and accelerated shift to online buying). Arcadia brands’ own online channels and wholesale business (retail store portfolio was not acquired) would add around 8% to the company’s revenue on 2020 levels. Although these brands had wholesale partnerships with Asos, management considers most sales to be incremental. Arcadia brands could benefit from improved purchasing scale and technological platform at Asos, while Asos could benefit from Topshop and Topman’s existing wholesale relationships with Nordstrom in the U.S., with some cross-selling potential. Topshop and Topman brands are priced slightly higher than Asos designs, Miss Selfridges is priced significantly below and targets younger consumers, while HIIT is priced in line with Asos athleisure, but has room for product range expansion and expansion into men’s categories. In the most recent year to August 2020, the acquired brands generated a small loss at EBITDA level.

Asos is a leading European e-commerce player in fashion and cosmetics focusing on the 20-something-year-old demographic segment. It offers more than 85,000 products on its website from its own label and around 950 third-party brand partners. We believe that through its wide reach (over 20 million active users globally with over 10% of population reach in its home United Kingdom market), Asos benefits from traces of network, cost, and intangible asset advantages. Although we don’t believe those advantages are strong enough to warrant a moat currently, we expect the network effect and intangible asset advantages to strengthen over time as more customer traffic data is accumulated and better analytics allow improve conversion rates and customer loyalty; thus we grant Asos a positive moat trend rating.