Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Brexit is going to be bad for your wardrobe. Unless you buy it from Asos.

The online fashion retailer beloved of tech-savvy twenty-somethings is less exposed than rivals to a British departure from Europe, and might even be a beneficiary.

As Gadfly has noted, British retailers mostly pay for the products they buy from factories in China and south Asia in dollars. As the pound falls, these products get more expensive.

But Asos, unusually, still pays for most of the products it buys in sterling. About 85 percent of its costs are in pounds, according to analysts at Bernstein. 

That is partly because it still largely buys through wholesalers and agents, who will bear the brunt of sterling fluctuations more directly. Asos won't be immune from the impact of currency and commodity price changes further down its supply chain, but this intermediate step means they'll be less of a headwind.

Yet some 55 percent of Asos's retail sales came from outside of the U.K. in the six months to the end of February, and Asos reckons the biggest impact of weaker sterling is that it makes its clothing cheaper to overseas customers.

Going Global
Efforts to build Asos's business overseas are paying off, with 57 percent of sales outside the U.K. in 2015
Source: Bloomberg

This is exactly the opposite effect of a few years ago, when a strong pound made its products more expensive in overseas markets, hurting sales and profit.

A vote for Britain to leave the EU could provide a bit of a boost, from this perspective. The pound has already dropped more than 3 percent this year to $1.43, but could slide to $1.20 or even lower were the U.K. to split from the bloc, Bloomberg News reported.

Pound's Plunge
The value of the pound against the dollar has tumbled on Brexit fears
Source: Bloomberg

Of course Asos needs all the help it can get. It is facing competition from rivals, who are ramping up their online offerings. In the early days, rival retailers were more than happy to sell their best lines via the Asos site. Now they want more control over their Internet sales.

The company also faces the creeping threat from Amazon, which is aiming to do to fashion retailing what it did to books and entertainment. Asos reckons its focus on young, fashionable customers means it operates in a slightly different market to Amazon. But the U.S. behemoth should not be underestimated.

Asos's enterprise value is currently 1.8 times the next 12 months sales -- that's down from more than 5 times at the start of 2014, before the stronger pound, a warehouse fire and the the strain of a heavy investment program ate into profit. The discount to Amazon's enterprise value to sales ratio of 2 times is deserved, given the U.S. group's greater scale.

Not A Good Look
A string of profit warnings in 2014 took their toll on Asos's valuation
Source: Bloomberg Intelligence

To narrow the discount, Asos needs to rebuild profit, or grow much faster. The report Tuesday of a 25 percent increase in first half group revenue, and 18 percent increase in pre-tax profit, represent a good start. Eliminating about 4 million pounds ($5.7 million) of operating losses as a result of exiting China is also helpful.

In the meantime, the retailer that can sell you a tight "muscle-fit" T-shirt, is a surprisingly muscular hedge against Brexit.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net