QuickView: ASOS PLC

37% total retail growth rate (28% UK, 45% international) marked an acceleration from 30.4% in Q1 (UK 24.3%, international 34.4%) driven by strong Christmas trading. Looking forward, management expects sales growth to remain strong, a view supported by KPI data with active customers up 40% to 6m. Short-term investment in growth may restrain FY13 forecasts (subject to H2 top-line acceleration), but longer term, the earnings model and valuation look very much intact.

Investment in growth will affect short-term margin
Retail gross margins (-50bp in Q2) were the result of a ‘deeper than envisaged’ price investment. As a result, management revised down full-year margin guidance from +80-100bp to +20-40bp. In addition, marketing expense was ‘dialled up’ in December and is expected to be 5-5.5% of sales in FY13 vs a historic 4%. In isolation, we estimate that this could put a c £16m dent in FY pre-exceptional EBIT, assuming 34% growth for FY and no fixed-cost leverage. We estimate that FY sales growth would need to reach low 40% (H2 low 50%), with the full benefit of fixed-cost leverage outside marketing, for current FY13 consensus forecasts to be met.

Long-term guidance and outlook still very much on track
Despite the short-term investment-driven squeeze on gross and operating margin, the long-term outlook is still very strong. As the ASP-driven drag on gross margins improves in H2 (-4% versus -8%in H1), sourcing gains through higher volumes, a reduced supplier base and investment in a fuller sourcing team should become visible. The strength of the euro/US$ also helps, as ASOS receives significantly more in international sales in these currencies than it spends on product.

Consensus estimates: Are they realistic?
Consensus estimates for FY13 may nudge down a bit today, but with forward-looking KPIs supporting a continuation of the growth rate, in conjunction with the fixed leverage of recent investments in procurement, new warehouse facilities and local offices, long-term guidance and forecasts do not look at risk.

Valuation: Benchmark valuations not relevant
With its unique business model in UK retail, provided ASOS plc (ASC.L) continues to deliver 25-30% EPS growth, the share price is likely to respond accordingly.

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