Interim results from ASOS lends further support to broker Canaccord Genuity's thesis that the cost of the retailer's growth will continue to come in ahead of market expectations, “making its valuation hard to justify”.
ASOS reported a first-half pre-tax profit of £29.9m that was a “small” miss versus City expectation on sales growth of 27% was slightly below consensus expectations of 29% and a US performance a “little weaker” than expected.
The e-retailer's showing remained strong throughout its first-half trading, pushing gross its margin up 100 base points, in line with expectations.
As expected, operating costs grew ahead of sales, with warehousing costs the main drag factor as various distribution centres ramp up, but Canaccord pointed out that while ASOS' other costs appeared to have been well dealt with, despite the gross margin increase, its EBIT margin fell by 40bp to 2.6%, also in line with general consensus.
Canaccord reiterated its 'sell' rating on ASOS, along with its price target of 3,622p.
“We have been consistent sellers of ASOS with a thesis that the cost of growth will continue to come in ahead of market expectations making the valuation hard to justify – today lends further support to our thesis,” the broker said.
Analysts acknowledged that the miss versus H1 expectations is small, but in the context of materially raised cash costs, no change to profit guidance and shares trading for 66.7 times full year EPS, the shares were expected to react negatively.