StockBeat: Fallen Angel Asos Is Back in Fashion

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By Geoffrey Smith

Investing.com — The U.K.’s Brexit negotiators might be stuck in a ‘tunnel’, but ASOS PLC (LON:), fallen angel of the fast-fashion world, looks like it’s coming out of one.

Shares in the online clothing retailer rose 16% in early trading on Wednesday after a set of earnings for the fiscal year ending Sept. 30 that were remarkable mainly for the absence of any new shoes dropping. Another thing conspicuous for its absence was the lack of any numerical guidance for the coming fiscal year, with chief financial officer Mat Dunn only giving away a Capex target of 150 million pounds ($190 million) on a call with analysts.

It was a torrid year for a company that had been a stock market darling for much of the last decade: profits fell 68% as the new, highly-automated warehouses in both the U.S. and Europe, which were supposed to help it become a global player, suffered a succession of problems. Sales in the booming U.S. market grew only 9%.

CEO Nick Beighton admitted on an analyst call that the company hadn’t had the “bandwidth” to manage such a large project, but said the worst was now behind it.

“Having identified the root causes of our operational issues, we have made substantial progress over the last few months in resolving them. Whilst there remains lots of work to be done to get the business back on track, we are now in a more positive position to start the new financial year,” Beighton said.

He told analysts that the company’s investments mean it has now increased its throughput capacity to 10 million units a weeks – a fivefold increase from 2016. The focus now switches to squeezing the most out of those investments.

Crucially, the investments have helped Asos diversify its sales away from a U.K. market overshadowed by Brexit. Over 60% of its sales now come from abroad.

Even after its surge on Wednesday morning, Asos shares are still down by nearly half from 12 months ago, and the company trades at less than one year’s sales. By comparison, rival Boohoo trades at nearly three times that multiple – albeit Boohoo’s management has arguably deserved the premium having done a better job of managing the upscaling process.

Elsewhere Wednesday, Europe’s stocks were largely on the retreat, as traders tempered their hopes for a deal to stop the U.K. crashing out of the EU at the end of the month amid reports of dissent from U.K. Conservative Euroskeptic backbench lawmakers, and from the Northern Irish Democratic Unionist Party.

The benchmark was down 0.3% at 392.70 by 5 AM ET (0900 GMT), having hit its highest level since late July on Tuesday. The U.K. was down 0.2% while the more U.K.-focused was the worst performer in the region, losing 1.0%. The German was down 0.1% while the Swiss outperformed after a strong earnings report from pharma heavyweight Roche (SIX:).

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