What's going on?
ASOS, the UK-based online fashion retailer, saw its shares totter on Wednesday as it reported weaker-than-anticipated sales and profit growth and said it would be spending some £250 million investing in its international expansion.
What does this mean?
ASOS has been a strong market performer over the years, with sales growth at the ecommerce giant regularly in the double digits even as sales continue to shrink at traditional retailers. So it might not come as a surprise that its first miss on sales growth in about two years seems to have left investors shirty, especially as ASOS’ stock is pretty expensive relative to its current earnings.
Investors seem to be particularly unnerved by ASOS’ slacking sales growth in international markets, where the company faces a hard grind to become “the world’s number-one destination for fashion-loving 20-somethings”. Still, some think that this market reaction – which initially saw ASOS shares fall as much as 12% – might be overblown.
Why should I care?
For markets: ASOS’ stock has been one of the biggest UK success stories of the past decade, jumping in value by more than 2,000%. [tweet this]
As with other ecommerce companies like Zalando or even Amazon, ASOS’ stock price relative to the size of its profits is much, much higher than that of traditional retailers. That can be justified to an extent by their bumper sales growth and the promise of rising profits to come, but when customer growth slows (perhaps reflecting tepid overall consumer spending) and profits come under threat, investors can be quick to reverse their original high-stakes bets.
The bigger picture: Investors weren’t necessarily keen on ASOS’ planned “capital expenditure” (a.k.a. investment).
Laying out £250 million could hit the company’s short-term cash flow, and some analysts allege that ASOS has already taken too long to increase its profitability given its rapidly expanding customer base. However, as Amazon has demonstrated (its capital expenditure was $12 billion last year), ecommerce is often expensive to do well.