Asos Shares Drop as Retailer's Growth Comes at a Higher Cost

(Bloomberg) -- Asos Plc shares posted their biggest drop in five months as concerns mounted over the U.K. online fashion retailer's increasing cost of growth.

Price cuts to lure overseas customers were the main reason for a 40 basis-point contraction in Asos's retail gross margin in the first half, according to Chief Executive Officer Nick Beighton. The CEO expects the drop in sterling to drive up sourcing costs through the end of the year.

The shares fell as much as 7.4 percent to 5,536 pence in London, after having soared 80 percent over the last 12 months.

While Asos continues to lead the online fashion market, the lofty valuation of its shares is difficult to justify because the company's cost of growth “remains high and continues to rise,” Canaccord Genuity analyst Sanjay Vidyarthi said in an email.

The retailer, which sells own-label fashions alongside wares from brands such as Adidas and Ted Baker, has used the pound's weakness to lower prices for international customers at the expense of margins. Investments in a new distribution center and a U.K. customer loyalty program are also crimping profits, Beighton said.

The rapid growth of Asos and other online fashion players such as Amazon.com Inc. and Zalando SE has forced traditional store-based retailers to improve their e-commerce offers.

“Up until a few years ago Asos was able to grow at relatively little cost but fiercer competition in online retail means that to stand out now you have to spend,” Charles Allen, an analyst at Bloomberg Intelligence, said by phone.

As competition increases, Asos also faces economic headwinds in the U.K., where the pound has fallen since the vote to leave the European Union. That's putting upward pressure on the London-based retailer's costs and stoking inflation, potentially squeezing Britons' spending power as wages stagnate.

“Real incomes for our U.K. customers are likely to come under threat,” Beighton said on a call. “We will do everything within our grasp to hold prices for U.K. customers.”

Other highlights from first-half results:

• International sales grew 54 percent to 548.4 million pounds ($682.2 million)
• Asos raised its full-year sales-growth forecast range by 5 percentage points to between 30% and 35%
• U.K. retail gross margins fell by 200 basis points due to rising costs
• Asos expects to report full-year pretax profit broadly in line with consensus estimates for 80.6 million pounds

To contact the reporter on this story: Sam Chambers in London at schambers7@bloomberg.net.

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Thomas Mulier