ASOS Shares Plummet 20% as Firm Invests in Growth
Firm Increases Capital Expenditure to Boost Sales Capacity
Shares in British online fashion retailer ASOS plummeted as much as 20 percent on Tuesday as the company increased its spending plans to deliver longer-term growth at the expense of short-term profits.
Investment Plans Announced
ASOS, whose fast-changing fashions are a hit with internet-savvy twentysomethings, attracting fans such as singer Rita Ora, said on Tuesday that capital expenditure would increase this year from £55 million to at least £68 million.
Where Will the Investment Go?
The investment will be used to step up investment in warehousing in the UK and Germany, as well as in IT, in order to speed up deliveries and cut costs.
Impact on Sales and Profits
The investment will increase the firm’s annual sales capacity to £2.5 billion, ASOS said, over £1 billion higher than previously guided.
However, the operating margin for the year to August 31 is expected to be reduced to 6.5 percent, according to the company.
Analyst Reaction
Analysts at Liberum said that the lowered full-year operating margin guidance and raised capex support their longer-term thesis that the cost of growth will keep coming in higher than market expectations for ASOS.
The guidance implied a full-year pretax profit of £65 million, 7 percent below consensus, according to the analysts.
Conclusion
ASOS’ decision to increase its spending plans is a bet on the long-term growth of the company, despite the short-term impact on profits. Only time will tell if this strategy pays off.
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