ASOS just about justifies its premium rating

Online fashion and beauty store ASOS turned in its usual quarter of strong top line growth, although after the share's recent good run, market reaction to its trading update was muted.

Group revenues were up 31% to £145.2m in the group's fourth quarter, which following a change in year-end now runs to the end of August.

Retail sales were up 31% year-on-year (y/y), with a 15% rise in the UK and a 42% jump in international trading.

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The market had been looking for a y/y gain of around 30% for the group as a whole; Panmure Gordon had predicted UK sales would be up 17.0% and international sales 47.3% higher.

Peel Hunt was slightly more pessimistic, going for a 44.9% increase in international sales.

International sales now make up 65% of the company's total business, it said.

Retail sales for the full year to the end of August increased 38% to £538m.

ASOS's retail gross margin was up 70 basis points - or seven-tenths of a percentage point - on prior year, while the number of active customers on its site rose by almost a third to 5m by the end of August.

"Profit for the five months ended August 31st and pro forma full year, are expected to be in line with expectations, and we approach our new financial year with continued confidence," said Chief Executive Nick Robertson.

Broker reactionCanaccord Genuity has noted the fourth quarter (Q4) slow-down in sales growth but has no plans to change its bullish view.

The group confirmed that full-year expectations will be met, so the broker is not expecting any upgrades in respect of the fiscal year to the end of August 2012.

"Against a challenging backdrop we are encouraged that ASOS has kept its rate of sales growth above 30%," Canaccord Genuity analyst Wayne Brown said.

"The shares have had a good run outperforming the FTSE 350 retailer sector by 18% the past 3 months. The shares are likely to soften today,but we remain mindful that the largest shareholder (Bestseller) has increased its stake to 26% last week and this could provide support and aid to bid speculation," Brown suggests.

Peel Hunt reckons the figures are good enough to inspire modest upgrades in the consensus forecast towards its own forecast of full-year profit before tax of £44.5m, but is sticking with its neutral position on the stock.

"While medium-term prospects remain compelling, major initiatives from re-platforming are at least 12 months away. We see a year of consolidation ahead, with limited scope for upgrades. Hold," is the view of Peel Hunt's John Stevenson.

Panmure Gordon is clearly a fan, however, declaring that ASOS still has "it", whatever "it" might be.

"The UK performance was particularly impressive (+15% vs. consensus +13%, PGe [Panmure Gordon estimate] +17%). This shows that ASOS still 'has it' in the fiercely competitive UK market which is still ASOS's single most important market, representing 39% of retail sales in the nine months reported to date, and 35% in Q4," the broker said.

"We see ASOS as one of the most exciting stories in the sector, offering investors exposure to a rare combination of superior top line growth and careful margin expansion. Although the shares have increased by 63.6% year to date, vs. the UK general retail sector +21.6%, we continue to expect sector and market out-performance as the brand itself, as well as the website, continues to gain traction internationally," Panmure Gordon enthused.

If you subscribe to Panmure Gordon's bullish view, you will be investing at a heavy price, as the shares trade on a significant price/earnings premium to the UK market, but Panmure Gordon thinks this is deserved given the company's growth prospects and its continued ability to lead the way in the online fashion market.

"They are also on a marked discount to Amazon shares, for example, and deliver a superior free cash flow yield to Yoox (£20m net cash roughly at YE2012E)," the broker adds. Yoox is an Italian Internet and mail order fashion retailer.

JH