Asos Shares Plunge as Raised Spending to Weigh on Earnings

Asos Plc (ASC), the U.K.’s largest online-only fashion retailer, fell the most in six months in London as the company reported slowing sales growth and said increased investment will weigh on earnings this year.

The shares slid 8.3 percent to 5,800 pence, the steepest drop since Sept. 17. Revenue rose 26 percent in the two months through February, London-based Asos said today, compared with 38 percent in the previous four months. Growth was affected by the weakness of the Australian dollar and Russian ruble.

A 25-fold increase in the share price over the last five years has boosted Asos’s price-to-earnings ratio to more than 100 times, leaving the stock vulnerable to any kind of setback. Most analysts cut earnings estimates today after the company said spending to increase warehouse capacity and investment in a China startup will hurt profitability this year.

The reduced margin guidance “will likely weigh on earnings forecasts, and the shares near term,” Citigroup Inc. analyst Richard Edwards said in a note today. He expects average pretax profit estimates for the year ending in August to fall by 6 percent to 65 million pounds ($108 million).

Asos’s valuation before downgrades “leaves little room for disappointment,” analysts Simon French and Karl Burns at Panmure Gordon & Co. said in a note.

Bounce-Back

Chief Executive Officer Nick Robertson downplayed the latest sales slowdown, which came two months after the company said revenue growth weakened to 38 percent from 47 percent.

“Don’t read too much into a two-month period, it’s a very short period,” Robertson said in a telephone interview, adding that there has been a bounce-back in March.

“I’ve spoken to a number of retailers and February was soft for most, and then we had some currency working against us, particularly in Australia and Russia,” the CEO said.

In Australia, the weakness of the local currency made clothes about 15 percent more expensive for its customers, Robertson said, declining to give such details for Russia.

Capital spending this year will be at least 68 million pounds, compared with previous guidance of 55 million pounds, the company said. The increased investment will boost Asos’s annual selling capacity to about 2.5 billion pounds, more than 1 billion pounds higher than previously indicated, it said.

The margin of earnings before interest and taxes will narrow to about 6.5 percent of sales, it also said.

Asos is benefiting from growing demand for online fashion at home and abroad. Most of the company’s sales come from its international division, where retail sales increased 29 percent in the two months. U.K. retail sales gained 21 percent.

The number of active customers was 8.2 million as of Feb. 28, up 36 percent from a year earlier, Asos said today.

To contact the reporter on this story: Katarina Gustafsson in Stockholm at kgustafsson@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net Robert Valpuesta, Paul Jarvis

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