Asos remains confident despite slower sales growth

Asos shares dipped on Tuesday after the online clothing retailer's sales grew more slowly than expected amid "challenging" conditions in its largest European markets and with its US operations struggling to keep up with demand.

In the six-month period ended 28 February, group revenues came in at £1.31bn, 14% higher than the same period the year before, or 11% at constant currency rates. Growth of 13.3% in the second quarter was short of the 14.8% expected by City analysts.

Group retail sales were up 13% to £1.28bn for the half-year as UK retail sales climbed 16% to £481.5m but the "challenging" conditions in France and Germany saw European sales climb by just 10% to £402.2m at constant currency rates, way down from the 40% sales improvement seen the year before in the region.

US retail sales climbed 4% to £161.6m at constant currency, dropping by 3% in the three months ended 28 February, as Asos' new Atlanta warehouse struggled to keep up with demand, causing a backlog in shipments that will now be recognised in the next period.

Nick Beighton, chief executive, said: "Our retail gross margin guidance for the year remains. We will be increasing investment in price and marketing in the second half, particularly in France and Germany.

"Given the actions we are taking together with an improving US performance, we believe the group will deliver stronger growth in the second half. Consequently we remain confident that we will meet guidance for the full year."

The AIM-traded company shocked investors by downgraded its guidance in December following a "significant deterioration" in trading, with Asos forecasting sales growth of 15% as opposed to its initial target of between 20% and 25%.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "It may seem churlish to complain about 13% sales growth from a company in the retail sector, but Asos is a fast-growing online player targeting millennials, which isn’t bogged down in the problems besetting the UK high street. The market had come to expect 25% sales growth a year from Asos, but the company only expects 15% this financial year."

Khalaf also pointed out that Asos has fallen behind its sales growth target for two quarters in a row and is at the mercy of "a currency tailwind which can flip at any time".

Meanwhile, note from analysts at Liberum said: "Asos needs to return to the principles that had been central to its successful strategy and a move away from branded value products would be seen positively. While some may view Asos as a recovery play, we see the need to balance growth, margins, FCF and the need to fund incremental investment as higher risk in the near term."

Asos' shares were down 2.18% at 3,145.00p at 0848 GMT.