Interactive Investor

ASOS makes record profit during latest lockdown

8th April 2021 08:15

Richard Hunter from interactive investor

As shops stayed shut, more of us bought clothes online, which was great news for the Topshop owner.

There may be challenges to come, but for the moment online fashion retailer ASOS (LSE:ASC) is firing on all cylinders as pandemic lockdowns largely play to its strengths.

Revenues for the six months to 28 February 2021 have increased by 24%, supported by an active customer base which grew by a further 1.5 million to 24.9 million. The earnings margin spiked significantly to 5.9% from a previous 2.2% and sales in the core UK market (which represent 42% of the group total) jumped by 39%.

Along with a net cash position, even allowing for the recent £265 million purchase of the Topshop suite of brands, and operational cost savings based partly on lower returns of stock from customers, pre-tax profit surged by 253% to £106.4 million.

The company has managed to retain its young and trendy following and, following a partial return to the workplace and the renewed ability to socialise, ASOS could well benefit from many a refreshed wardrobe.

The addition of the Topshop brands are seen as both complementary to its existing offerings as well as providing another route to its youthful audience, and the initial signs of the integration are promising.

Although the pandemic has resulted in a net tailwind of £48.5 million, this is expected to reverse and so will shave some margin growth. At the same time, the company has highlighted that the economic prospects for its core “20-somethings” market are unclear once life returns to some kind of normality, and unemployment potentially spikes as the various government aid schemes are withdrawn.

At the same time, competition remains famously fierce and fickle in the sector, with the likes of Boohoo (LSE:BOO) in hot pursuit. The pandemic has also shifted the trend from the group’s strong “occasion wear” offering to the likes of casual wear and active wear, resulting in a need to constantly display the “sale” sticker . Covid-19 has also been partially responsible for putting some pressure on gross margins due to increased freight costs, although despite a decline of 2% the level remains at a very comfortable 45%.

Even so, ASOS has continued its stellar growth, as evidenced by its current size. The company has chosen to maintain its roots within AIM, even though its market capitalisation of £5.8 billion would be sufficient to warrant a place in the FTSE 100 index if it so desired.

The share price has also reflected the strength of the company’s performance. While it may not have returned to the peak of £76.30 achieved in March 2018, the shares have nonetheless soared over the last year, rising 270%, as compared to a gain of 62% for the wider FTSE AIM 100.

Prospects for the company are clearly on the boil as far as investors are concerned, where despite the strength of the share price the market consensus remains at a 'buy'.

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