The Citys focus on quarterly trading statements and near-term forecasts can make it hard to step back and look at the bigger picture. Yet most of the best retail investments over timescales of decades have been companies whose long growth runways have left rich short-term valuations far behind in their wake.
I believe ASOS (LSE: ASC) whose goal is to become the worlds no.1 fashion destination for 20-somethings could be one of those great retail success stories for long-term investors. Indeed, I would not be surprised to see the company, which is currently listed on Londons junior AIM market, transfer to the Main Market and enter the FTSE 100 within five years!
ASOS today released its results for the year ended 31 August. As expected, revenue burst through the 1bn mark for the first time. The company posted a top-line number of 1.15bn, up 18% on last years 975m, and said: Trading year to date has started well We currently anticipate sales growth for the new financial year of c.20%.
For the medium term management remain focussed on achieving our next staging post of 2.5bn sales. At 20% annual growth that staging post would be passed within five years.
To put ASOSs sales and its potential FTSE 100 credentials into context, lets compare its position with current blue-chip fashion retailers Next, Primark and Burberry, during the periods in which their sales rose to over 2.5bn.
| Year | Next (1999-2004) (bn) | Primark (2005-10) (bn) | Burberry (2010-15) (bn) | ASOS (2015-20) (bn) |
| 0 | 1.24 | 1.01 | 1.19 | 1.15 |
| 1 | 1.41 | 1.17 | 1.50 | 1.38 (est.) |
| 2 | 1.57 | 1.60 | 1.86 | ? |
| 3 | 1.87 | 1.93 | 2.00 | ? |
| 4 | 2.20 | 2.31 | 2.33 | ? |
| 5 | 2.52 | 2.73 | 2.52 | 2.50+? |
As you can see, Next, Primark and Burberry all achieved the feat Im suggesting ASOS is capable of. Note also that they were able to do this during different periods: (Next 1999-2004), Primark (2005-10) and Burberry (2010-15). A great fashion retail business can grow whatever the external environment.
I believe ASOS has the wherewithal to break through the 2.5bn revenue mark on the same timescale as Next, Primark and Burberry did.
ASOS carries over 800 brands, and this year added Abercrombie & Fitch, Hollister, Boohoo, Missguided, Adidas and Reebok to the roster. Collaborations on exclusive lines and support for new or little-known brands make ASOS a go-to destination for fashion conscious 20-somethings. The companys own brand is also becoming a growing force.
ASOS is rightly in my opinion focusing at the moment on sales, scale, reach and investment for the future. Im not too concerned about profits right now 47.3m operating profit was only marginally ahead of the prior years 46.6m because as efficiencies come through profits should rise nicely.
Its worth noting that ASOSs growth is self-funded. The company has no borrowings, operating cash flow for the year was 93.1m, and cash on the balance sheet at the end of the year was 119.2m, up from 74.3m at the prior year end.
ASOS shares are up almost 6% at 31 on the back of todays results. Nevertheless, based on current-year forecasts, the companys price-to-sales ratio of 1.9x compares favourably with Burberry (2.1x) and Next (2.8x). (The ratio for Primark cant be calculated because its part of the Associated British Foods conglomerate.)
On the basis of its long growth runway and attractive price-to-sales ratio, I believe ASOS is very buyable at current levels and could be another fashion retailer in the FTSE 100 by the end of the decade.
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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended shares in Burberry. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
