We don’t expect to materially change our fair value estimate as Asos delivered weaker revenue but better profitability in fiscal 2021 than we expected and came up with 2022 and midterm targets that are broadly comparable with our forecasts. After losing around one half of value year to date - and falling 15% on Monday - we see shares as attractive, given the still strong potential runway for growth for the business and over 60% upside to our fair value estimate.
For the year to end-August 2021, the company reported 20% revenue growth with a significant slowdown in the second half (versus 25% full-year growth we forecast and 24% growth in the first half of the year). Nonetheless, and despite gross margin pressures of 200 basis points mainly due to freight cost inflation, the company delivered a solid operating margin of 4.90% (3.80% in our forecasts), or 5.30% adjusted for acquisition integration costs, thanks to continuing benefits from coronavirus-related lower return rates, which have started to normalise, lower travel expenses and operating efficiencies.
Some of the cost savings were reinvested in marketing spending, which increased from 3.70% to 5.10%. The company plans to increase marketing expenses as a percentage of revenue by 1% midterm (4.50% historical levels and 4.70% in our assumptions for the next five years), which we see as reasonable to drive brand awareness in core focus markets (Europe and the US) and given the increased marketing spending push by peers such as Zalando.
For the next fiscal year, Asos expects revenue growth of 10%-15% (our forecast of 14%), a notable deceleration from 19%-20% growth in the past two years due to higher comparables, due to lockdowns and supply constraints currently affecting Asos and its suppliers. Asos targets profit before taxes from £110 to £140 million (£144 million in our forecast) with no recurrence of Covid-19-related benefits from lower returns, cost pressures in the supply chain and marketing investments.
