Fashion Trends And Supply Chain Efficiency Will Define Success

Key Takeaways

• Strategic model transformations and efficient operations aim to enhance gross margins and EBITDA, positioning ASOS for sustainable growth.
  
• Innovations in supply chain and customer engagement, including the Test & React model and ASOS.WORLD loyalty program, drive revenue and earnings improvement.
  
• ASOS's focus on cutting costs and shifting strategies could impact revenue generation and market share due to challenges in attracting and retaining customers.

Catalysts

Operates as an online fashion retailer in the United Kingdom, the European Union, the United States, and internationally.

• ASOS is focused on becoming the most inspirational fashion destination for 20-somethings, enhancing customer engagement and driving future revenue growth by offering exciting and relevant products. This will likely boost revenue.
  
• The company is transforming its business model to be more sustainable and resilient, aiming for a 60 million GBP increase in EBITDA, driven by higher gross margins and efficient operations. This will improve net margins.
  
• New strategies such as the Test & React model allow ASOS to quickly adapt to fashion trends, resulting in a 15% contribution to sales from own brands, with plans to increase this to 20% in the next six months. This could lead to higher earnings due to better inventory management and less markdown.
  
• ASOS is optimizing its supply chain by reducing costs and improving efficiency, which has already cut supply chain costs by 20% and accelerated stock turn by 35%, freeing up capital for reinvestment. This improves EBITDA.
  
• The introduction of a new loyalty program, ASOS.WORLD, and enhanced personalized customer experiences aim to boost customer retention and order frequency, projecting a positive impact on revenue growth.

ASOS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASOS's revenue will grow by 2.7% annually over the next 3 years.
• Analysts are not forecasting that ASOS will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate ASOS's profit margin will increase from -10.9% to the average GB Specialty Retail industry of 2.9% in 3 years.
• If ASOS's profit margin were to converge on the industry average, you could expect earnings to reach £86.2 million (and earnings per share of £0.72) by about May 2028, up from £-294.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, up from -1.2x today. This future PE is lower than the current PE for the GB Specialty Retail industry at 18.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.56%, as per the Simply Wall St company report.

ASOS Future Earnings Per Share Growth

Risks

• ASOS has been reducing stock, promotions, and investment in performance marketing, which may impact revenue generation if they cannot attract new customers or retain existing ones effectively.
  
• The decline in sales in the U.S. market by 28% indicates potential challenges in maintaining revenue in international markets, particularly given the strategic decision to prioritize profitability over the top line, affecting overall revenue performance.
  
• The competitive landscape involves challenges from new entrants and existing players who may offer lower prices or more attractive deals, potentially impacting ASOS's revenue and market share growth if ASOS is unable to competitively price their offerings or maintain consumer interest.
  
• There are operational risks associated with supply chain transformations and reducing fulfillment center costs, which, if not effectively managed, could impact service levels and customer satisfaction, thereby affecting revenue and net margins.
  
• The shift away from heavy discounting may not resonate with all consumer demographics, especially those seeking bargains, potentially impacting ASOS's revenue if they fail to engage adequately with budget-conscious segments.

Valuation

• The analysts have a consensus price target of £4.036 for ASOS based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £7.9, and the most bearish reporting a price target of just £2.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £2.9 billion, earnings will come to £86.2 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 12.6%.
  
• Given the current share price of £2.87, the analyst price target of £4.04 is 28.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.