2Q19 Trading Update

UK-based fashion pure play ASOS released its 2Q19 trading update for the three months ended February 28, 2019. These are the highlights:

• ASOS grew group revenues 11.0% year over year to £658.5 million on a constant-currency basis (up 13% year over year as reported), compared to 13% growth in the previous quarter. The company’s total retail revenue grew 11.0% year over year to £641.3 million on a constant-currency basis (up 13% year over year as reported), compared to 12% growth in the previous quarter.
• The company’s retail gross margin expanded 40 basis points year over year.
• Total orders grew 15% year over year to 17.3 million, compared to 16% growth in the previous quarter.
• In terms of customer engagement, active customers (who shopped in the last twelve months as of 28 February) increased 16% year over year, average selling price fell 1%, average basket size decreased 1%, average basket value fell 2%, order frequency (last twelve months’ total orders divided by active customers) increased 4% and conversion was flat.

By region, ASOS reported the following:

• UK: ASOS grew UK retail sales 14.0% year over year to £244.4 million, compared to 19% growth in the previous quarter.
• International: Total International retail sales increased 9% year over year to £396.9 million on at constant exchange rates (up 13% year over year as reported), compared to 9% growth in the previous quarter.
• Within International, US sales were down 3% on a constant-currency basis (up 4% year over year as reported), compared to 11% growth in the previous quarter; in 2Q19, US demand exceeded supply once ASOS’s new Atlanta warehouse went online and this caused a “significant short-term despatch back log.” EU sales were up 8% on a constant-currency basis (up 12% year over year as reported), compared to 14% growth in the previous quarter. Rest of world sales grew 21% at constant exchange rates (up 20% year over year as reported), compared to a 2% decline in the previous quarter.

On the analyst call, CEO Nick Beighton commented that US sales had been impacted by a “massive increase in conversion rates” in the “three or four days” following its new Atlanta warehouse going online: The company used the extra capacity to increase brand choice, spurring a jump in customer sales – the biggest increase in demand Beighton says he had seen in the nine years he has been at ASOS. The surge in orders created operational issues which took four weeks to resolve, but the resulting backlog of orders hit 2Q19 sales. These orders will roll over into 3Q19, supporting US sales growth in ASOS’s next reporting period.

Beighton pointed to a “consumer confidence problem” in both Germany and France. The gross-margin increase in 2Q19 gives the company flexibility to invest in marketing in Germany and France, and the company will invest in promotions in the US, Beighton said.

Outlook

In the trading statement, Beighton said, “We will be increasing investment in price and marketing in the second half, particularly in France and Germany. Given the actions we are taking together with an improving US performance, we believe the group will deliver stronger growth in the second half. Consequently, we remain confident that we will meet guidance for the full year.”

Management maintained its previously issued guidance for FY19, namely:

• Sales growth of about 15%.
• Retail gross margin contraction of about 150 basis points.
• An EBIT margin of approximately 2%.
• Capital expenditure maintained at roughly £200 million.
• Net debt of about £50 million.

In FY19, according to the consensus estimates recorded by StreetAccount, analysts expect ASOS to report revenues of £2.79 billion, up 15.8% year over year, and EPS of 52.7 pence.