US Edition 
Questor share tip: Sell Asos as profits fall
Questor needs to see more evidence of a profit recovery before jumping on the bandwagon, sell.
Asos
£22.60+316p
Questor says SELL
ONLINE retailer Asos [LON:ASC] saw its shares jump 15pc yesterday as investors believed the worst was over and the rebuilding can begin.
However, Questor won’t be jumping on this bandwagon just yet and is waiting for more evidence of a recovery in profit growth.
Investors have seen the shares collapse this year, from highs of about £70 in January to £22.33 yesterday, after the group said profit growth was slowing and a warehouse fire disrupted UK operations.
Asos reported full-year pre-tax profits of £46.9m to the end of August, short of initial expectations of £65m.
The damage was done in Australia, the retailer’s most profitable market. A combination of an economic slowdown, too much stock and a strengthening pound meant prices had to be slashed to clear items, and profits suffered as a result.
The “rest of the world” division, of which Australia contributes the lion’s share, reported sales growth of just 5pc for the year, down from 35pc growth last year. The division contributes about a quarter of group sales and profits.
While sales are slowing sharply on one side of the world, in Britain they are accelerating. The UK reported sales growth of 35pc during the year, and an acceleration on the 32pc growth rate reported during the first half.
However, sales in the UK are made at a lower profit margin. The UK remains Asos’s largest single division, contributing about 38pc of group revenue and 36pc of group gross profits. So, if sales are growing more rapidly in your lowest profit region than your highest profit region, the overall profit growth is slower than expected. The UK also has a higher rate of returns than elsewhere in the group at around 39pc, above the group average of 31pc.
Taken together, this suggests a less profitable business. Nick Robertson, co-founder and chief executive, was cautious on the outlook for next year, adding that even though he believes the stock build-up is largely cleared, prices will be lowered overseas to drive sales.
Questor said sell on January 14, with the stock at £66.50, and thinks the shares at £22.33 still do not represent good value; trading on 45 times the revised profit figure of £48m for August 2015, giving earnings per share of about 43.3p. With profits falling, competition increasing and capital investment high, it remains a sell.