Online Retailers (BOO, ASOS, OCDO, AO., NXT) : new paradigm or Emperors new clothes?

Monday, Nov 23 2015 by

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 and 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. 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 ('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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Boohoo Group PLC, formerly plc, is an online fashion retail group. The Company is based in the United Kingdom and has a presence in the United Kingdom, the United States, Europe and Australia, selling products to almost every country in the world. The Company owns the boohoo, boohooMAN, PrettyLittleThing, Nasty Gal, MissPap and Karen Millen and Coast brands. These brands design, source, market and sell clothing, shoes, accessories and beauty products targeted at 16-30 year old consumers in the United Kingdom and internationally. more »

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Asos PLC is a global fashion destination for a range of things. The Company sells and offers a range of fashion-related content on The Company's segments include UK, US, EU and RoW. It sells over 85,000 branded and own-label products through localized mobile and Web experiences, delivering from its fulfilment centers in the United Kingdom, the United States, Europe and across the world. It offers approximately 75,000 separate clothing ranges, spanning women's wear and menswear, footwear and accessories, alongside its jewelry and beauty collections. The Company's collection of specialist own-label lines includes ASOS Curve, ASOS Maternity, ASOS Tall and ASOS Petite. The Company caters a range of customer segments and sizes, across all categories and price points. It also operates returns centers in Australia and Poland. It operates country-specific Websites in Australia, France, Germany, Italy, Spain, Russia and the Unites States. more »

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Ocado Group plc is a United Kingdom-based online grocery retailer. The Company's principal activities are grocery retailing and the development and monetization of Intellectual Property (IP) and technology used for the online retailing, logistics and distribution of grocery and consumer goods, derived from the United Kingdom. The Company offers end-to-end operating solution for online grocery retail based on technology and IP, suitable for operating its own retail business and those of its commercial partners. The Company's brands include Ocado, Ocado Smart Platform, Sizzle, Fetch and Fabled. Sizzle is a kitchen and dining store. The Company's Ocado Smart Platform is a solution for operating online retail businesses. The Company's Ocado Smart Platform combines its end-to-end software and technology systems with its physical fulfilment asset solution. more »

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  Is LON:BOO fundamentally strong or weak? Find out More »

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VegPatch 29th Feb '16 1 of 1

Ocado still struggling to make its economics work for potential users by the look of the potential deal today with Morrisons. One cynic might say the reason why Ocado hasn't signed an international partner might be that their UK partners, Waitrose & Morrisons, wont give potential clients a good reference of the Ocado experience.

Ocado still not for me and Amazon looks to be entering the space via Amazon Pantry and Amazon Prime Now. Amazon is another company not knowingly run for profits. Always the worst kind of competitors as they aren't always rational over normal time periods. Having said that the market Amazon is aiming for is not huge, but it still adds virtual supply into an already brutally competitive market place.

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