Online fashion retailer Asos has posted a 22 percent drop in profits as it boosts spending on international expansion, particularly into China.
The company said pre-tax profit for the six months to February 28 hit £20.1 million ($33.4 million) down from the £25.7m at the same time last year, but retail sales saw a 34 percent rise.
The drop in profit was expected. Shares in the Aim-listed company stumbled last month after it issued a profit warning. Wednesday morning, Asos shares were flat, having rallied 59 percent in the last 12 months.
"These results are all about the investment we are now putting in. We're putting in the infrastructure now both in technology and in warehousing to double the size of business over the next few years, and that's cost us," Nick Robertson, CEO of Asos, told CNBC in a TV interview.
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China expansion
Asos has accelerated its infrastructure investments as it eyes up sales of £2.5 billion per year. The British company will invest £68 million in upgrading its depot in Barnsley, North England, building a new "Eurohub" in Berlin, expanding a facility in Ohio and opening a new warehouse in Shanghai.
Last year Asos launched a dedicated Chinese website in an attempt to tap the fashion-hungry consumers in the world's second-largest economy and has done the same in markets such as Russia and Germany.
Robertson said the company's operations are still small in China but is there for the long run.
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"We are still a start-up in China. The business there is much much smaller than the rest of it. So we are on a long journey there…we expect to be there for many years to come," he said.
"We have always said the biggest opportunity for Asos is actually outside of the U.K. where 96 or 97 percent of those twentysomethings live."
Sales in the European Union were up 65 percent on the same time last year, with strong growth in France and Germany.
Analysts told CNBC that Asos will need to establish itself in China quickly and large capital expenditure will continue as it expands.
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"There is a big growth opportunity out there but you have to spend quite a lot to get it," Rahul Sharma, founder of Neev Capital, told CNBC in a phone interview.
"I think the key issue right now is building any kind of awareness in China because right now they don't really register. You need to have product and people need to know you're out there and that costs money."
Billion-pound sales target
Robertson confirmed that Asos was on target to hit its first billion pound sales year, but the said the company must grow at "late-20, early-30" percent for the rest of the year.
Asos also reported it had 8.2 million active customers as of February 28, up 36 percent on the previous year, while retail gross margin was up 60 basis points.
"The key thing they have to deliver on is continued strong growth in the U.K. They have previously disclosed February trading was weak so we need to see a return to more traditional growth patterns," Simon French, consumer analyst at Panmure Gordon, said in a phone interview.