Asos is growing but does it have value for investors?

10th February 2012

Can you name the three largest non-food retailers in the UK by market capitalisation? B&Q owner Kingfisher, Marks & Spencer and Next? Very good – now how about the fourth largest? No, it is not Home Retail Group, Dixons, Mothercare, French Connection or even Debenhams – all those big, well-established brands are still smaller than relative newcomer Asos, which has a market cap of £1.3bn.

Despite its size, the online fashion and beauty retailer is not a terribly profitable business. This year it is forecast to make £30m of profits, which puts it on a price/earning (P/E) multiple of more than 40x. There is nothing the market likes so much as growth – Asos has grown quickly and enough investors believe it will continue to do so, which is why they are willing to pay such a sky-high multiple.

By comparison, the smaller but rather better-known Debenhams is expected to make four times Asos's profits, giving it a P/E ratio of 7x. Meanwhile Home Retail Group, which as the owner of Argos and Homebase is clearly facing some issues, is still forecast to make £73m at the nadir of a recession. Yes, only a couple of years ago the group notched up £300m in profits but today investors are being asked to pay 10 times depressed profits for Home Retail and 40 times peak profits for Asos.

None of this is to attack Asos, which is a perfectly sound business, but rather to flag up two points.

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