UPDATE 3-ASOS shares dive as cost of growth hits profit

Tue Mar 18, 2014 10:55am EDT

* Investment in warehouses and IT to hit profits

* Capex hike to cut 2013-14 operating margin to 6.5 pct

* Sales capacity to treble to 2.5 bln pounds within a year

* Shares fall up to 22 pct (Adds detail, CEO, analyst comment, updates shares)

By Neil Maidment and James Davey

LONDON, March 18 (Reuters) - Shares in British online fashion retailer ASOS hit a 5-year low on Tuesday after the firm said it would invest more rapidly in infrastructure to meet future demand at the expense of short-term profits.

ASOS, founded in 2000 by current chief executive Nick Robertson, is a favourite of internet-savvy 20-somethings and has also attracted high-profile fans including singer Rita Ora and U.S. First Lady Michelle Obama.

Its shares have doubled over the last year, giving it a stock market value of 5.3 billion pounds ($8.8 billion) at Monday's close. But they they fell as much as 22 percent on Tuesday - their biggest one-day fall since October 2008.

"You can't win these days, you grow like stink, invest for the future and (still) take a hammering," Robertson, who owns 9.3 percent of the equity, told Reuters.

By 1443 GMT ASOS had lost around a tenth of its stock market value, which in turn wiped around 50 million pounds off the paper value of Robertson's 9.3 percent stake.

ASOS said it would boost capital spending in the 2013-14 year to at least 68 million pounds - 13 million more than previous guidance, as it bought forward investment to extend and automate its warehouse in Barnsley, northern England, and establish a "Euro hub" warehouse in Germany.

The investment, which will help speed up deliveries and cut costs, will push the firm's annual sales capacity to 2.5 billion pounds within a year, ASOS said, more than 1 billion pounds higher than previously guided and more than treble the 769.4 million pounds of sales it achieved in the year to Aug. 31, 2013.

However, combined with investment in its China start-up, the company warned the capex hike would reduce its 2013-14 operating margin to 6.5 percent, below the 7 percent expected by analysts.

Robertson said the firm was now guiding to a 2013-14 pretax profit of about 65 million pounds versus a previous expectation of about 69 million.

"This is costing us but it's our belief it's the right thing to do," he said.

Analysts cut forecasts to reflect the new guidance.

"The lowered full-year operating margin guidance and raised capex support our longer-term thesis that the cost of growth will keep coming in higher than market expectations for ASOS," Liberum analysts said.

However, analysts at Barclays were more supportive. "It is valued on sales growth rather than near-term earnings, and growth expectations have not changed on the back of the second quarter statement," they said.

ASOS posted a 26 percent rise in retail sales to 136.7 million pounds for the two months to Feb. 28, the bulk of its second quarter, missing forecasts for 33 percent growth, in part due to unfavourable currency movements in Australia and Russia.

"That really is just an 8-week thing, if you take the half year (retail sales up 34 percent) that's all fine," said Robertson. "February was a bit weak and March has come back."

ASOS said it remained confident of achieving sales of 1 billion pounds in the 2013-14 year and expected its operating margin to rebound in 2014-15.

Robertson said more detailed guidance on when the firm expected to fulfil its new sales capacity could come at its half-year results on April 2.

Analysts broadly expect ASOS to post sales growth of about 30 percent a year.

($1 = 0.6008 British Pounds) (Additional reporting by Sudip Kar-Gupta; Editing by Kate Holton and Ruth Pitchford)

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