Financial Analysis of ASOS

Introduction to Accounting

1

FINANCIAL ANALYSIS FOR

INTRODUCTION TO ACCOUNTING

2012


ContentsExecutive Summary...............................................................................................................................4

Introduction...........................................................................................................................................5

Brief History...........................................................................................................................................5

Company Performance Ratio.................................................................................................................7

Profitability........................................................................................................................................7

Return on Capital Employed..........................................................................................................7

Gross Profit Margin........................................................................................................................7

Company Performance Ratio.................................................................................................................8

Profitability........................................................................................................................................8

Operating Profit Margin.................................................................................................................8

Net Profit Margin...........................................................................................................................8

Return on Capital Ratio..........................................................................................................................9

Analysis on the ROCE.........................................................................................................................9

2008 - 2009....................................................................................................................................9

2009 - 2011..................................................................................................................................10

2012.............................................................................................................................................10

Gross Profit Margin..............................................................................................................................11

Analysis on GPM..............................................................................................................................11

2008 – 2010.................................................................................................................................11

2011.............................................................................................................................................12

2012.............................................................................................................................................12

Operating Profit Margin.......................................................................................................................13

Analysis on Operating Profit Margin....................................................................................................13

2008 - 2010..................................................................................................................................13

2011.............................................................................................................................................13

2012.............................................................................................................................................14

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Net Profit Margin.................................................................................................................................14

Analysis of Net Profit Margin...............................................................................................................14

2008 - 2010..................................................................................................................................14

2011.............................................................................................................................................15

2012.............................................................................................................................................15

Conclusion...........................................................................................................................................16

Forecasts.....................................................................................................................................16

Recommendations...............................................................................................................................17

Bibliography.........................................................................................................................................19

Appendix..............................................................................................................................................20

Average daily visitors.......................................................................................................................20

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Executive Summary

The reason for this chosen performance ratio is to compare the earnings of the

company with the expenses as it is known that the top priority for potential

shareholders is to know if the company will give them a return at the end of the

financial year; this will also show the company’s overall efficiency and performance

which is also key.

This Profitability selected area will give prospective investors a view of the

performance in the company’s profit for the past 5 years and what the forecast looks

like in the years to come. The emphasis of this report is to expand the potential

shareholders’ knowledge about the advantages or disadvantages of investing in

ASOS. There will also be brief glance at the market share to which ASOS holds in our

growing fashion world especially in the UK.

From the report, a conclusion will be drawn and recommendations made with

backed up analysis from previous years as to why it is profitable or not profitable to

buy shares in ASOS.

4


Introduction

This report aims to focus on ASOS. One of the reasons is because it is a relatively new

company and it has been a global phenomenal to which many use at some point in

life.

The rationales behind this report were to critically analysis the profitability of ASOS,

within this report there will be a focus on the profitability, which will look into the

gross profit margin, return on capital, net profit margin, and operating profit margin.

All this will support to determine if the company either a profitable on unprofitable

venture to invest in.

After all the findings a conclusion will be drawn as to if it is profitable for

shareholders to invest in ASOS or if it will be advisable for shareholders to look into

investing in its competitor.

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Brief History

ASOS is an international online fashion and beauty retailer and offers over 50,000 branded

and own label merchandise across womenswear, menswear, footwear, accessories,

jewellery and beauty.

As a company, ASOS developed websites to target the UK, Australia, Spain, USA, Germany

and France also delivers to over 190 other countries from the central supply centre in the

UK. ASOS is targeted at fashion accelerative 16 to 34-year-olds; ASOS attracts over 13

million exclusive visitors a month and 3.2 million active customers from 160 countries.

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Company Performance Ratio

Profitability

Return on Capital Employed2008 2009 2010 2011 2012

Return on Capital Employed

Net Income x 100% 7311 x 100% 14125 x 100% 20339 x 100% 15705 x 100% 30349 x 100%(Non-Current Liabilities +

Shareholder Fund)(680 +15944) (0 + 25709) (0 + 45478) (0 + 72120) (0 + 95235)

=73110016624

141250025709

203390045478

157050072120

303490095235

= 43.98% 54.94% 44.72% 21.78% 31.87%

Gross Profit Margin2008 2009 2010 2011 2012

Gross profit margin

Gross profit x 100% 37284x 100% 71699 x 100% 93132 x 100% 131690 x 100% 251970 x 100%Sales 81044 165395 222999 339691 494957

=3728400

810447169900165395

9313200222999

13169000339691

25197000494957

= 46.00% 43.35% 41.77% 38.77% 50.91%

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Company Performance Ratio

Profitability

Operating Profit Margin2008 2009 2010 2011 2012

Operating Profit Margin

Operating Profit x 100% 6962x100 13935 x 100 20311 x 100 15907 x 100 31199 x 100Sales 81044 165395 222999 339691 494957

=69620081044

1393500165395

2031100222999

1590700339691

3119900494957

= 8.59% 8.43% 9.11% 4.68% 6.30%

Net Profit Margin2008 2009 2010 2011 2012

Net Profit Margin

Net Profit x 100% 7311 x 100% 14125 x 100% 20339 x 100% 15705 x 100% 30349 x 100%Sales 81044 165395 222999 339691 494957

=73110081044

1412500165395

2033900222999

1570500339691

3034900494957

= 9.02% 8.54% 9.12% 4.62% 6.13%

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Return on Capital Ratio

Return on capital employed (ROCE) is a measure of the revenues that a business is achieving

from the capital employed, generally considered in percentage. “Capital employed equals a

company's Equity plus Non-current liabilities (or Total Assets − Current Liabilities), in other

words all the long-term funds used by the company. ROCE indicates the efficiency and

profitability of a company's capital investments.” (Anon, 2011)

By paralleling net income to the totality of a company's debt and equity capital, you will get

a vibrant picture of how the use of leverage influences a company's profitability. As an

analyst, a consideration of the ROCE measurement to be a more broad profitability measure

because it gauges the management's ability to generate earnings from a company's total

capital. “ROCE should always be higher than the rate at which the company borrows

otherwise any increase in borrowing will reduce shareholders' earnings, and vice versa; a

good ROCE is one that is greater than the rate at which the company borrows.” (Anon, 2011)

For this calculation, this report has used the profit before tax method (Net profit before

taxation), bearing in mind that the taxation charges in the accounts can be subject to various

adjustments, and this method will measure the pre-tax profit against what the shareholders

like yourselves have invested in the entity.

Analysis on the ROCE

From Fig.1, it is clear that the company has seen some sort of growth in the past years.

2008 - 2009

ASOS saw the highest rise in the company’s profit till date, there was an outstanding result

for ASOS The Company made record sales that were up by 90% to £81.0m, and record

profits (before tax), up 117% to £7.3m, this was achieved when a number of retail

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businesses were reporting rough trading conditions. 2008 was the only year that ASOS had

long-term liability affected the overall return in that year.

2009 - 2011

During this year’s there was a widely forecast for the slowdown in consumer spending,

especially with the younger customer group and the Internet continued its robust growth as

a retail channel. In the year 2010, ASOS turned ten and has had cutting-edge growth from a

small innovative start-up to a leading UK fashion brand. Although the company saw a dip in

2011, a continuous investment as was being made has the company is said to have a very

bright future.

2012

The sudden change as

explained earlier explained

was a loss of competitive

advantage in the market and

it is clear that the company is

gaining its market share back

in the year 2012. Therefore it

shows that the company is

able to extract more earnings

out of every pound of capital it employs. As a high ROCE specifies that a larger chunk of

profits can be invested back into the company for the benefit of shareholders.

Consistency is a key aspect to performance. In other words, investors have continued to

reinvest in the company on the basis on how the ROCE has behaved over some years and

have followed the trend closely. ASOS is a company that, year on year, it’s earns higher

returns on every pound invested in the business and has a higher market valuation.

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Fig. 1


One of the main things to look out for is the fact that ASOS does not have a huge long term

borrowings or owing’s running the company on the shareholders fund; this means that, all

monies will be for the profit of the shareholders and the company.

Gross Profit Margin

“Gross profit of an entity is its remaining profit after selling a product or providing a service

and deducting the costs connected with its production, rendering and sale. The

accompanying costs can include manufacturing costs, raw material expense, direct labour

charges, and other directly attributable costs.” (Anon, 2005)

Gross profit is a very significant measure to be considered when analysing the profitability

and monetary performance of a company. Gross profit is a vital gauge because it indicates

the proficiency of the management in using labour and materials in the production process.

“Changes and trends in gross profit margin often provide valuable information for the

investors. Therefore, the gross profit of a company should be analysed over a number of

periods”. (Atrill, 2001)

Analysis on GPM

“Although gross profit provides the significant evidence about how much mark up a

company can make on its sales, it is not the best measure of profitability of a company as a

whole because it excludes many costs such as financing costs and overhead expenses”.

(Anon, 2005) Therefore profitability of a company should not be measured solely on the

basis of gross profit.

2008 – 2010

There was a steady decline during these years within the company, with the main dip in

2011 as a result of other online fashion companies coming into the market and it was also

down to the recession that the world is experiencing currently.

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In 2010 ASOS introduced free delivery thresholds and free returns, this brought about a net

loss for the year of £2.9m. The cost of free returns was charged directly against the P&P

margin, this cost was £1.6m in the second half.

2011

Like in the calculation of the ROCE, one can see here also that in the year 2011, the same

decline was reflected in the company’s financial report. This confirms that the economic

situation was one of the causes of the decline. Although there was a decline in the gross

profit margin, from the calculation below shows that for every £1 of sales generated, ASOS

makes around £0.39 gross profit in the year 2011. A sharp decrease in the gross profit

margin and the corresponding sharp increase in sales may propose that the company has

lowered prices in order to stimulate sales.

2012

The calculation below shows

that for every £1 of sales

generated, ASOS makes

around £0.51 gross profit in

the year 2012. This is seen as

the year the company made

its highest profit till date.

Fig.2

You can see here in Fig.2 that the company in the last five years has not seen a year where it

is making less that £0.30 per every pound generated in its sales. The graph above compared

with an industry average of these years suggests that the company had a satisfactory

performance in 2012. In 2012 the 'ASOS' own-label brand established its own identifications

as a global fashion brand and Menswear saw a particularly strong performance in that year.

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Operating Profit Margin

“Operating profit also known as return on sales (ROS) points out how much profit an entity

makes after paying for variable costs of production such as wages, raw materials, etc. (but

before interest and tax). It is the return attained from normal operations and does not

include unique or one off transactions. ROS is usually expressed as a percentage of sales

(revenue).” (Anon, 2005)

Operating profit margin can be used both as a tool to analyse a company's performance

compared to its past performances. The ratio varies widely by industry but is useful for

comparing dissimilar companies in the same industry. Let's face it, as an investor your main

objective is to make money and retain it; this depends largely on liquidity and efficiency.

Since this physiognomy determines a company's capacity to pay investors a dividend,

profitability is echoed in share price. “Naturally, because the operating profit margin

accounts for not only costs of materials and labour, but also administration and selling costs,

it should be a much smaller figure than the gross margin.” (Anon, 2005)

Analysis on Operating Profit Margin

2008 - 2010

If you follow the historical amendments of the operating profit margin on Fig.3 from 2008 –

2010 it is clear that ASOS are operating at about 7% on return on investment.

2011

There was significant

drop of about 60% in

the operating profit

margin in 2011; this can

be either down to

direct costing or

spending within the

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Fig. 3


organisation. For the 2011 ASOS invested substantially in its people during the year, taking

on 273 new colleagues.

The recruitment strategy made payroll increase by 38%, thereby delivering further operating

cost improvement. This was done in aid to make sure that the necessary expertise and

management structures are in place to deliver its future growth strategy. Other factors are

production of the goods, warehousing the goods, marketing and depreciation all this was

increased in 2011 due to the new competition in the online fashion industry.

2012

In 2012 ASOS invested in price points and quality of the 'ASOS' own label, which helped

increase the growth of the brand, whilst technological innovation continued through

developments like iPhone and iPad shopping apps, magazine apps, developments to the

Fashion Finder and Marketplace websites. Another factor was the fact that ASOS launched

the country-specific websites in Australia, Spain and Italy.

Net Profit Margin

“The profit margin expresses to you how much profit a company makes for every £1 it

generates in revenue or sales.” (Kennon, 2009)

Net profit margin is one of the most important models used to understand a company’s

performance; net profit is not a measure of how much cash a company received during a

specified period, this is because the income statement includes a lot of non-monetary

expenses such as depreciation and amortization.

Analysis of Net Profit Margin

2008 - 2010

There was a steady growth with the between these year apart from the slight decline in

2009. This was quickly improved in 2010 as seen in Fig.4. There was an improved

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advertising investment, which drove a 130 basis point dilution in the retail margin, and in

addition, ASOS offered customers a number of free delivery periods over the Christmas

trading period. This effort accounted for most of the weakening in the net profit gross

margin.

2011

In 2011 ASOS saw the sharpest low for years in the company, some of the factors to this was

the restructuring on the

people side; these included

the dual site decollation

costs, relocation and

redundancy costs, staff

training, and other one-off

costs. In this case, lower net

profit margins signifies a

pricing strategy; especially

as a retailer, who is known

for their reasonably priced goods with a high-volume approach.

2012

Over the historical four years, ASOS has financed over £35m in guaranteeing that technology

in the company is of the top standard and high-tech. knowing fully well that customers value

the depth of choices that, online processes can offer.

During the 2012 Marketplace was rolled out to International sites and now promote product

from a number of international boutiques. ASOS Magazine and shopping apps was also

launched to exploit the increasing movement of mobile browsing; “16% of ASOS traffic is

now via mobile”. (Beighton, 2012).

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Fig. 4


Conclusion

In conclusion, it is advisable that potential investors invest in ASOS; reasons for this

conclusion are that;

ASOS transits into this new financial year with confidence, and persists to be committed to

its global growth plans and to driving shareholder value. The Group's overall strategy has

been re-examined to exploit on its current size and prestige, and investment in the

compulsory resources will remain to ensure effective delivery of those objectives.

ASOS as a company and an international group is well on its way to becoming the world's

number one online fashion destination. Currently over 50 million people visit ASOS online

fashion store each year: in two or three years, that figure could double due the investments

that being pumped into the company. (Check appendix 2. for the traffic to other online

fashion website). ASOS remains a company that flows with the culture and phase that we

live in, this is one of the reasons why many of its customers stay loyal to the company

because they know that what is in vogue in the society will be found on the site.

As it is clear that there has been a continuous growth in ASOS and the only year where there

was a decline was in 2011, which, was known to be the year of major investment into the

organisation in UK and overseas. This has brought about much growth in 2012 and it looks

set to bring a higher return in 2013 and years after.

Within the next year, it is forecasted that the EPS is to grow by 70% which will give a return

of 1,515.50p per share, see Fig 5.

Forecasts

Year EndingRevenue

(£m) Pre-tax (£m) EPS P/E PEG EPS Grth. Div Yield

31-Aug-13 734.88 56.07 50.57p 42.4 0.6 +70% 0.10p 0.0%

Fig.5

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From the findings of this report, it is recommended that potential shareholders invest in the

business because in the last year ASOS's share price has fluctuated from 1,142.00p to

2,530.00p and stockbrokers are presently rating this stock as buy; the current trade price

per share is 2,165.00p.

From Fig 6, you can see that profitability of the company together and it is clear that the

only major declining year was 2011 and that the company is on its way back up.

Fig.6

Recommendations

One of ASOS’ message to potential shareholder is “ASOS applies a philosophy of aligning the

interests of shareholders and management team by sharing risk and reward through equity

participation. Through a combination or organic growth and capital investment we aim to

continue to profitably develop our businesses and therefore deliver total shareholder

returns, to the benefit of all shareholders, employees, customers, suppliers, local

communities and other stakeholders.” (Lord Alli, 2012) .

It was decided by ASOS that in the short term, shareholders' greatest benefits are served by

on-going reinvestment of money to exploit the considerable growth prospects both in the

UK and overseas.

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Comparing ASOS with current companies like Shop Direct Group who owns the Very brand,

is only launching its international agenda. The Shop Group also owns the Littlewoods and

Isme.com; these companies have been in existence for more than 10 years and one would

think the global agenda would have been in the pipe line a while ago. Whilst the Shop

Direct Group seem to be a threat to the success of ASOS, it is clear that ASOS is much more

forwardly sophisticated than its competitors.

It is also recommended that shareholders invests in a known company like Shop Direct

Group and it is seen that most online fashion companies are starting to integrate the ideas

that ASOS had in selling product from other designers and not just own brands. This can

appear as a threat to the company but with the accelerative thinking of ASOS’s directors,

other companies might still be left in the dust of its speed. Main recommendation is to

adequately invest for a strong return in 2013 and keep an eye on the market.

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Bibliography

1. Anon., 2005. Investopedia. [Online] Available at: http://www.investopedia.com[Accessed 7 Novermber 2012].

2. Anon., 2011. Ready Ratios. [Online] Available at: http://www.readyratios.com[Accessed 7 November 2012].

3. Atrill, H. M., 2001. Accounting fo Business. 3rd ed. Oxford: Butterworth.

4. Beighton, N., 2012. ASOS. [Online] Available at: http://asos.annualreport2012.com[Accessed 10 NOVEMBER 2012].

5. Dyson, 2010. Accounting for Non-Accounting Students. 8th ed. Essex: Pearson.

6. Kennon, J., 2009. Beginner Invest. [Online] Available at: http://beginnersinvest.about.com[Accessed 10 November 2012].

7. Lord Alli, C., 2012. ASOS. [Online] Available at: http://asos.annualreport2012.com[Accessed 10 NOVEMBER 2012].

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Appendix

Average daily visitors

comScore rankings for 15-34 year olds (31 March 2012) showing ASOS as the second most visited fashion website on the planet (daily)

Average daily visitorsVANCL.COM 920

ASOS 749H&M.COM 606

Nike 465Moonbasa.com 458Trendyol.com 380Inditex Group 375Inditex Group 375

Bonprix 353Forever 21, Inc. 327Limitedbrands 317

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Financial Analysis of ASOS