Analysis: Why Asos' rising capex will pay dividends

The etailer reported big rises on every metric: interim pre-tax profits rose 10% to £29.9m while sales leapt 25% to £1.16bn. UK sales climbed 22% while international grew 28%, and now makes up the lion’s share of revenues.

The etailer hit the one billion visits to its website for the first time in a six-month period, while active customer numbers climbed 17% and order numbers rose 28%.

What’s more, it hired 700 staff in the six months, is rallying support for its modern slavery initiative, is investigating the possibility of giving members of its Premier subscription service bags for life in order to cut down on plastics, and is even looking at how to use recycled plastic to create swimwear.

An across the board success then. Yet the City’s reaction was to push the shares down 5% at one point, and they ended the day 2% down. That was partly because Asos’ profits were a touch below expectations, but mainly because it was revealed that capex would increase by around £30m to between £230m and £250m over the full year.

“As digital technology continues to change life rapidly, its adoption by retailers is surely essential to pre-empt, reflect and cater for the customers making it part of their everyday lives”

Some brokers expressed concern that Asos had underestimated investment needed and that its rapid growth was not delivering sufficient margin benefits.

Beighton countered that view robustly, saying that he was “particularly pleased” with the business’ performance “given the high investment we are putting through our organisation and the high level of change”.

Tech updates

Of course, every penny that does not make its way back into shareholders’ pockets is viewed as a bad thing in the City. But such spending may not be a bad thing at all.

Instead, it shows that Asos is digging deep for another stage of growth – those shareholders should get their pennies back, and then some.

Asos completed 1,200 tech updates – ranging from app design improvements such as enhanced visual search to refreshed site navigation – during the last six months, up from 1,300 over the whole of 2016/17. In 2012, that number stood at just 100.

It’s this behind-the-scenes work that lets it move so quickly into the more exciting-sounding areas of augmented and virtual reality and artificial intelligence.

“AI is going to be a game-changer for us in many important areas, not only improving customer experience but also lowering the cost of how we operate our business model”

Nick Beighton, Asos

As digital technology continues to change life rapidly, its adoption by retailers – particularly online specialists – is surely essential to pre-empt, reflect and cater for the customers making it part of their everyday lives.

Saving money

Although it is still investing, Asos has now reached the point where it is beginning to reap the cost benefits of such technology too.

On AI, Beighton pronounced: “We are increasing our trialling and investment within artificial intelligence. This is on the back of our visual search capability.

“This is going to be a game-changer for us in many important areas, not only improving customer experience but also lowering the cost of how we operate our business model.”

One example of this is a trial – currently live on around 200 products – which uses AR technology to show how the same product looks on three different body types.

That development is both highly practical and taps into Asos’ millennial mindset. Customers are more likely to feel reassured that an item will suit them and purchase it, and are less likely to return it because it fits their body type. Here, Asos wins financially.

But it’s also a clever move from a brand perspective – not every customer is a 5 ft 9 size eight – and millennials are more conscious of body positivity and diversity than generations before them.

So although Asos’ rising capex has dismayed some in the Square Mile, it makes sense. You’ve got to spend money to make money, as the saying goes.