ASOS shares dive as profits take a hit from cost of growth

LONDON Tue Mar 18, 2014 11:00am GMT

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LONDON (Reuters) - Shares in British online fashion retailer ASOS plunged to a five-year low on Tuesday after the firm said it would increase investment in its warehouses and IT systems to meet increasing demand at the expense of short-term profits.

Founded in 2000 by chief executive Nick Robertson, ASOS has been the success story of British retailing in recent years with its fast-changing fashions snapped up by Internet-savvy twenty-somethings, attracting fans such as singer Rita Ora.

To help cash in on rising online demand, the firm said on Tuesday capital expenditure would increase this year to at least 68 million pounds ($113 million) from 55 million as it steps up investment in IT and in its British and German warehouses.

The investment, which will help speed up deliveries and cut costs, will push the firm's annual sales capacity to 2.5 billion pounds within a year, ASOS said, more than 1 billion pounds higher than previously guided and more than treble the 769.4 million pounds it achieved in the year to August 31, 2013.

However, combined with investment in its China start-up, the company warned the capex hike would reduce its 2013/14 operating margin to 6.5 percent, below the 7 percent expected by analysts.

ASOS shares fell as much as 22 percent, the biggest one-day fall since October 2008, and were trading at 5,454 pence, down 14 percent, by 1047 GMT, wiping 720 million pounds off its market value, as analysts pencilled in the drop in profits.

"The lowered full-year operating margin guidance and raised capex support our longer term thesis that the cost of growth will keep coming in higher than market expectations for ASOS," Liberum analysts said, noting the guidance implied a 2013/14 pretax profit of 65 million pounds, 7 percent below consensus.

The investment plans came alongside a 26-percent rise in second quarter retail sales for ASOS in the two months to February 28, which missed forecasts for 33 percent growth, in part due to adverse currency movements in Australia and Russia.

Sales growth was solid in Britain and strong in Europe but fell well below expectations in its rest-of-the-world division, rising 3 percent versus expectations of 24 percent.

ASOS said it remained confident of achieving sales of 1 billion pounds for the 2013/14 fiscal year and told Reuters it expected its operating margin to rebound in 2014/15.

Robertson said that more detailed guidance on when the firm expected to fulfil its new sales capacity could come at its half-year results on April 2. Analysts broadly expect ASOS to post sales growth of about 30 percent a year.

(Additional reporting by James Davey and Sudip Kar-Gupta; Editing by Kate Holton and Louise Ireland)

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