UBS lowers Asos to 'neutral' on margin concerns

Analysts at UBS dropped online fashion retailer Asos from 'buy' to 'neutral' on Tuesday, telling clients that while it was turning more positive on the company's topline growth, it was less positive on its margins.

While the Swiss broker was ahead of the consensus in its 2019 sales estimates for Asos, its analysts said they were "more cautious" on the level of margin investment required to drive said growth.

Over the past six months, changes to pricing, promotions and newness had "significantly impacted Asos's top line and margins", according to UBS - which then went on to analyse how these were changing across eight markets.

UBS said that projections for improved customer acquisition through higher "newness" and more competitive pricing were behind its above consensus forecasts for topline growth in 2019 but it added that "the cost of growth doesn't seem to be easing".

The broker cut its target price on Asos's shares from 3,500p to 3,300p, explaining that its own data suggested the e-commerce powerhouse was investing more margin than previously expected in order to reaccelerate customer acquisition and growth in the US, leading it to assume it numbers would come in 20 basis points below margin guidance.

All in all, UBS said: "Ultimately, Asos's ability to deliver the future margin expansion expected by the market depends on CAC amortising over customer lifetimes.

"This year, customer acquisition cost has risen but we expect flat revenue per customer. Evidence of improving 'newness' in UBS Evidence Lab data, which Asos sees as a major driver of organic customer acquisition, is encouraging but we see no evidence to suggest this will be reflected in lower CAC."