The City’s focus on quarterly trading statements and near-term forecasts can make it hard to step back and look at the bigger picture. Yet most of the best retail investments over timescales of decades have been companies whose long growth runways have left rich short-term valuations far behind in their wake.
I believe ASOS (LSE: ASC) — whose goal is to become “the world’s no.1 fashion destination for 20-somethings” — could be one of those great retail success stories for long-term investors. Indeed, I would not be surprised to see the company, which is currently listed on London’s junior AIM market, transfer to the Main Market and enter the FTSE 100 within five years!
ASOS today released its results for the year ended 31 August. As expected, revenue burst through the £1bn mark for the first time. The company posted a top-line number of £1.15bn, up 18% on last year’s £975m, and said: “Trading year to date has started well … We currently anticipate sales growth for the new financial year of c.20%”.
For the medium term management “remain focussed on achieving our next staging post of £2.5bn sales”. At 20% annual growth that staging post would be passed within five years.
To put ASOS’s sales — and its potential FTSE 100 credentials — into context, let’s compare its position with current blue-chip fashion retailers Next, Primark and Burberry, during the periods in which their sales rose to over £2.5bn.
| Year | Next (1999-2004) (£bn) | Primark (2005-10) (£bn) | Burberry (2010-15) (£bn) | ASOS (2015-20) (£bn) |
| 0 | 1.24 | 1.01 | 1.19 | 1.15 |
| 1 | 1.41 | 1.17 | 1.50 | 1.38 (est.) |
| 2 | 1.57 | 1.60 | 1.86 | ? |
| 3 | 1.87 | 1.93 | 2.00 | ? |
| 4 | 2.20 | 2.31 | 2.33 | ? |
| 5 | 2.52 | 2.73 | 2.52 | 2.50+? |
As you can see, Next, Primark and Burberry all achieved the feat I’m suggesting ASOS is capable of. Note also that they were able to do this during different periods: (Next 1999-2004), Primark (2005-10) and Burberry (2010-15). A great fashion retail business can grow whatever the external environment.
I believe ASOS has the wherewithal to break through the £2.5bn revenue mark on the same timescale as Next, Primark and Burberry did.
ASOS carries over 800 brands, and this year added Abercrombie & Fitch, Hollister, Boohoo, Missguided, Adidas and Reebok to the roster. Collaborations on exclusive lines and support for new or little-known brands make ASOS a go-to destination for fashion conscious 20-somethings. The company’s own brand is also becoming a growing force.
ASOS is — rightly in my opinion — focusing at the moment on sales, scale, reach and investment for the future. I’m not too concerned about profits right now — £47.3m operating profit was only marginally ahead of the prior year’s £46.6m — because as efficiencies come through profits should rise nicely.
It’s worth noting that ASOS’s growth is self-funded. The company has no borrowings, operating cash flow for the year was £93.1m, and cash on the balance sheet at the end of the year was £119.2m, up from £74.3m at the prior year end.
ASOS shares are up almost 6% at £31 on the back of today’s results. Nevertheless, based on current-year forecasts, the company’s price-to-sales ratio of 1.9x compares favourably with Burberry (2.1x) and Next (2.8x). (The ratio for Primark can’t be calculated because it’s part of the Associated British Foods conglomerate.)
On the basis of its long growth runway and attractive price-to-sales ratio, I believe ASOS is very buyable at current levels — and could be another fashion retailer in the FTSE 100 by the end of the decade.