Questor: the British tech firm whose systems are ‘better than anything Amazon has’

Richard Evans 27 November 2019 • 5:59am

Asos models — Asos appears to have surmounted the warehousing problems that crashed its share price

Questor share tip: Asos looks like a fashion retailer but it is also a technology business that is ‘showing the rest of the world how it’s done’, according to one investor

“This is a global retail giant in the making.” Readers may be surprised to hear that this quote, from a fund manager who holds the stock, refers to Asos, the online fashion shop that has been in the headlines for all the wrong reasons in recent months.

The firm has ambitious overseas expansion plans but problems at key warehouses in Europe and America resulted in two profit warnings and a collapse in the share price from £77.30 in March last year to £31.40 at yesterday’s close.

But Fahad Hassan of Atlantic House Fund Management said the problems at the distribution centres which had prevented orders from being shipped, leading to disgruntled customers and problems with working capital, appeared to have been fixed.

“A lot of British retailers struggle overseas because they don’t know what products work in foreign markets but this was a matter of operational efficiency,” he said. “The warehouse problems had a severe effect on profitability: global margins fell from 8pc to 2pc.”

In fact, what sets Asos apart from traditional clothing retailers is that it doesn’t even try to predict what its young fashion-conscious buyers will like: instead, it uses its technology, some of the most advanced in the world in this area, to detect buying trends and respond to them instantly.

Trend followers

“Asos makes full use of the data it collects to see if something isn’t selling and switch the emphasis to something that is,” Mr Hassan said. “This way you don’t tie up money in things that aren’t shifting. If you can do this quickly enough you don’t need to try to predict what will be fashionable, unlike traditional retailers such as M&S.

“It comes from having good data and using it effectively, and Asos’s systems are better than rivals’ in this respect.”

It also has a clever piece of software that improves customers’ chances of ordering the right size of a chosen item first time.

Not only is this no easy task, as different manufacturers tend to mean slightly different things by “size 10”, for example, but it has a major influence on profitability because if customers can get the right size first time there will be fewer returns and less “over-ordering” (buying the same item in various sizes and returning the sizes which don't fit).

“The algorithm that does this is better than anything Amazon has and will continue to improve,” Mr Hassan said. “This is one of the few times I’ve seen a British tech firm being ahead of the game. It’s demonstrating not only fashion know-how but also tech know-how.”

He also praised the company’s broader business model. “It sees itself as a ‘single point of contact’ for its key demographic, people in their 20s,” he said.

“To be able to sell them almost everything it has teamed up with about 900 other brands, including Nike and Adidas, which account for 60pc of sales. It’s the Amazon model: a retail portal for style and clothes. You get a bigger share of customers’ wallets than if you just sell your own brand.”

He said competitors in this area made 20pc margins and “Asos’s margins should return to those levels as the distribution centres get fixed”.

“It will make about £3bn of sales this year. Margin improvement and sales growth should imply about £500m in operating profits in three or four years, compared with £35m last time. That would put the shares on a very low multiple, so they could double or even treble from here.”

Questor says: buy

Ticker: ASC

Share price at close: £31.43

Update: Capita

Atlantic House also holds Capita, the outsourcer, tipped here in the past. The firm said: “It was out of favour and lost clients. Now it has a new management team, has axed the dividend and raised money by issuing new shares.

“The balance sheet is fixed and the business is no longer in danger, while political risk is minimal. Profitability is restored and if management do what they say it should generate a decent amount of cash, so the dividend could be reinstated. On this basis the shares have never looked cheaper.”

Questor says: hold

Ticker: CPI

Share price at close: 160.95p