Welcome to the Morningstar sector review. I'm Holly Black. With me today is Jelena Sokolova.
She's an equity analyst at Morningstar in Amsterdam.
Thanks for joining us. Jelena Hi. Thanks for having me.
So, we're talking today about online retail because we've had ASOS release its full year
results. Can you tell us a bit about what was in the update?
Yeah. So, the results were more or less in line with expectations and also with management
guidance that it released the updated guidance in July when it profit warned. So, the results
were more or less in line with that guidance. No big surprises.
So, a couple of things that I spotted in the report were profits are going to be down 68%
this year, and they're now working to resolve some issues they had at warehouses and with
other operational sort of problems. But despite that the share price is up today. What's the
reason for the mismatch? Yeah. So, first of all, as I mentioned, the
bad news was already known by the market. So, the share price also has been down very
much in in July when the profit warning happened. Now, the results were in line. The company
said that they have made a good progress on the resolution of the warehousing issues.
Now, they basically have to invest more in marketing and price proposition to get the
customers back as well. So, they're also signal that they will be focused more on cost control
within the organization, which I think was taken positively by the market and also on
the capital discipline now that the warehousing infrastructure was developed in the main global
markets. Also, to mention that the shares are now trading at less than half of the peak
levels in 2018. So, that also helps explain the positive market reaction.
So, what's the outlook for ASOS like going forward? And you know, for the whole online
retail space, is it still looking healthier than High Street retail?
Yeah, definitely so. Even in the U.K. market, which is the most mature market for ASOS,
the growth has been 15% this this year with 7% growth in active customers. And that compares
to very low single digit growth in general apparel sales in the U.K. So, clearly, the
market share is being taken by the online players and we see the same trends happening
in the U.S. and also in Europe. In continental Europe, the online penetration is still below
that in the U.K. So, there could be more upside potential. As I mentioned, for ASOS, U.K.
is the most mature market, but it has upside for growth in European markets and the U.S.
markets where it is ramping up now, will be also locally supplied from the local warehouses.
The potential is big but the competition on the online space is also in intensifying.
Yes. So, one of the things that's made ASOS so successful is it had this first mover advantage.
But we now see a lot more players in the space. Are there any other companies that you like?
So, in the online apparel space, I'm covering Zalando, ASOS and Farfetch. Those are the
three that I'm focused on. I think the Zalando is currently fairly valued. I think that ASOS
had upside potential. It was a 4-Star stock up to today's announcement and big share rally.
So, from now on the margin of safety for investment has shrunk in my view. I think Farfetch is
an interesting player in sort of a pure play luxury online space, which is growing faster,
and penetration is lower, and the shares have been beaten down also since the IPO. I think
that stock could be an interesting one to have a look, but of course, very risky as
well, because the company is still not generating profits or cash flows.
Jelena, thank you so much for your time. Thank you.
And thanks for joining us.