hy just looking at revenue and profits growth is misleading
There is a great deal of time spent on this website comparing the relative merits of two internet retailers Boohoo.com and ASOS.com. But I thought I would be good to widen the debate to include AO World and Ocado and then throw Next (.com) into the mix as well.


Part of the reason internet only retailers have gained so much attention is that there is a paucity of them on the stockmarket: boohoo, ASOS, Ocado. AO.com Combine this scarcity value with high revenue growth rates in an environment where retail sales have generally been lacklustre and bingo - a new paradigm is born.

Capital Light
Perceived wisdom also dictates that these businesses 'should' have higher operating margins as they have low overheads such as no shops or shop staff and because the Internet is still growing, customer acquisition costs are low. Hence any revenue growth should also see huge operational leverage as a high proportion of each marginal £ of sales, after the cost of goods sold (COGS) is deducted, falls to the bottom line. Being internet businesses also they are thought to be "capital light", ie to grow sales all you really need is a clever marketing campaign, the more digital the better, and you can just service these sales for little investment ie they don't have to deploy much capital.

Only the theory hasn't worked out that well.


Struggling to achieve operational gearing
Ocado struggles to exhibit any meaningfully positive operational gearing. Sales have risen from £400m in 2009 to over £900m in 2014 yet EBIT has risen from -£14m to the giddy heights of £17m. The marginal drop through of each pound has been a whopping 6.2%...ASOS has grown sales from £340m in 2010 to £1150m in FY15. EBIT has grown from £16m to £47m. Again a staggering marginal drop through of 3.8%. Would it make you feel better if I told you that the Gross margin at ASOS is 50% and 33% at Ocado. So the drop through after cost of good sold really has been poor. AO World (AO.com's parent) isn't much different although the public trading history is shorter. Great sales growth from £164 in 2011 to £476m in FY15. However EBIT has gone from £4m to MINUS £2m over this period. Proper negative operational gearing.  Top of the…

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