Liberum downgrades Asos after profit warning, Credit Suisse upgrades

Liberum downgraded the stock to 'hold' from 'buy', slashing the target price to 2,800p from 8,000p.

Asos shares sank on Monday after it downgraded its guidance for the year as weaker trading in November and heavy discounting took their toll.

Liberum said the group has proved to be more susceptible to deep discounting in the marketplace than it had feared and this may have been compounded by management not reacting quickly enough to this threat.

"We note the recent resilient trading updates from Joules, Ted Baker and Boohoo, which demonstrate that brand-led businesses with a clear vision and market positioning are better placed in tougher times," it said.

"It raises questions about the susceptibility to short term trading conditions at both Asos. The sensitivity to changes in the working capital profile have contributed to the delayed phasing of Asos's capex this year, which is sensible, but reminds us that Asos is a wholesaler and, at times when sales growth slows, the risks to cash and the balance sheet are acute."

Liberum cut its FY19 earnings per share estimate by 54% and said it now expects sales growth to slow from 23% to 15% year-on-year and retail gross margins to drop by 150 basis points versus a flat forecast previously.

The brokerage also reduced its capex assumption from £250m to £200m, reflecting the re-phasing by six months of the final stages of the automation of the US distribution centre in Atlanta. In addition, it now forecasts net debt of £39m for FY19E compared to expectations of a broadly flat debt position previously.

Credit Suisse took a different approach, bumping Asos up to 'outperform' from 'neutral'. It said that after Monday's profit warning, the shares have now fallen 66% from the year’s high and while near-term sales and margins are unpredictable, the group has a business model with medium-term potential to grow and generate cash.

The bank, which cut its price target to 3,500p from 6,000p, said it forecasts a gradual recovery in EBIT margins for ASOS. It pointed out that the management team is about to change quite materially, with the recent arrival of Adam Crozier as chairman and the imminent arrival of CFO Mathew Dunn, from Britvic and SABMiller.

"In our opinion there should be opportunities to reduce some costs at Asos, and as distribution leverage starts to ramp up in Europe and subsequently North America, more of this may come down to the bottom line than has been the case to date."

At 1045 GMT, the shares were up 3.2% to 2,697p.