BofA stays at 'underperform' on Asos, cites long-term margin concerns

Analysts at Bank of America hiked their target price for shares of Asos, judging that consensus was overlooking the "strong" short-term outlook for the online retailer's sales.

Lower return rates should also translate into improved margins over the near-term, they added.

Whereas the median estimate from consensus was for negative growth in P3 revenues, they had penciled in growth of 15.7%.

Hence their decision to mark up their target price for the stock from 2,050.0p to 2,750.0p.

BofA also noted the "meaningful acceleration" in downloads of Asos's app between April and 16 June, particularly Stateside.

Yet on longer time frames, the upside potential for margins would continue to be capped by its wholesale model, they predicted, and therefore left their recommendation at 'underperform'.

Indeed, their assumption for the group's "terminal" margins was just 5%, which was less than competitor Boohoo was already and below Zalando's target for 10.0-13.0%.

Furthermore, Asos's two-year compound annual rate of growth in sales, of 16.0%, continued to decelerate.

And buyside analysts at least had already priced that better short-term outlook into the shares, BofA also said.

On the back of all of the above, BofA was now projecting financial year 2020 topline growth of 20% (consensus: 7%) and earnings before interest and taxes of £78m instead of the £4m previously seen.

"Online e-commerce margins appear to be benefitting from two factors (1) lower promotional intensity, which is consistent with our discounting analysis on pg 5; and (2) a mix benefit from casualwear. We expect gross margins -50bps in H2'20.

"[...] Longer term we believe the wholesale model ASOS pursues caps its margin potential."

On the basis of their estimates, Asos shares were trading on a 2020 price-to-earnings multiple of 59.5, falling to 45.9 in 2021 and 44.5 in 2022.