Morgan Stanley downgrades ASOS to 'underweight', starts Boohoo at 'equalweight'

Morgan Stanley downgraded online fashion retailer ASOS to 'underweight' from 'equalweight' and cut the price target to 5,000p from 5,170p, highlighting underappreciated risks.

The bank said ASOS shares have performed on the back of accelerating growth, which has been driven partly by price investments fuelled by a weaker pound, adding free returns to all its key geographies and a sharp reduction in delivery times to places like Russia or Australia.

"Expectations are higher now and tailwinds are coming to an end," it said, adding that the company continues to invest in the proposition, but the new changes might not have as much impact.

"We question the sustainability of growth in the US and Rest of World given the artificial tax benefit outside of Europe. We also see greater fashion-related risk in these regions.

"ASOS' continued investment in the customer proposition means we question whether the margin could exceed 5% in the medium to long term."

In the same note, Morgan Stanley initiated coverage of Boohoo.com at 'equalweight', saying it appears well placed to deliver strong growth near-term but against demanding expectations and with scaling risks mid-term.

It said Boohoo has so far shown that it can sell cheaper product whilst generating a higher gross profit margin through clever sourcing.

"It has also shown that its creative advertising offline and on social media can deliver a high return for the brand. Whilst some of the margin concerns we have for ASOS are shared by Boohoo, its much smaller scale and newer brands ramping up should translate into best-in-class growth rates, in turn helping it leverage its fixed cost base."

At 1105 GMT, ASOS shares were down 1.5% to 5,933p and Boohoo was up 3.9% to 173.75p.