Asos shares plunge as profit warning shakes retail sector
Online fashion retailer reveals ‘significant deterioration’ in sales ahead of Christmas
Shares in Asos tumbled more than 35 per cent on Monday morning after the online fashion retailer known for its fast growth warned on profits, adding to fears that the crucial Christmas trading period has been tough for UK retailers.
Showing that the consumer slowdown that has weighed on high street chains is now also hitting the previously stronger online sector, Asos warned of a “significant deterioration” in trading during November.
This came after a blunt warning from Sports Direct chief executive Mike Ashley, who said last week that Christmas shopping had been so bad for retailers it would “literally smash them to pieces”.
Over the weekend, consultancy Springboard also said that the number of people visiting British shops in November was the worst since the 2008 recession, with so-called footfall at retail parks and high streets down 3.2 per cent on the year before.
“2018 has been progressively worse and weaker [for retailers] as the year has unfolded but this accelerated from October,” said Richard Hyman, a retail consultant.
“We had very mild weather in October and that was exacerbated by widespread uncertainty. Stuff that goes on in Westminster . . . the endless uncertainty has affected people.”
Asos’ shares fell £14.65p to £27.21p, triggering a sell-off across the UK fashion sector. Shares in Next fell 3 per cent to 4,214p, while Marks & Spencer was down 3.5 per cent at 254.2p.
Shares in other online European retailers also dropped as investors grew nervous over potential contagion from the high street to the online retail sector. Shares in Berlin-based online fashion retailer Zalando tumbled as much as 16 per cent. Swedish fashion retailer H&M Hennes & Mauritz also saw shares decline by about 3 per cent in early London trading.
Boohoo.com, a rival to Asos that sells cheap-priced fast fashion, rushed out its own update in response, reassuring shareholders that it “continues to trade comfortably in line with market expectations”.
Asos said on Monday that “whilst trading in September and October was broadly in line with our expectations, November, a very material month for us from both a sales and cash margin perspective, was significantly behind expectations”.
The group added it had “reduced [its] expectations for the current financial year,” and downgraded its adjusted profit margin forecast to 2 per cent, from 4 per cent the year before.
Asos also forecast that its sales growth for the year to August 2019 would be around 15 per cent, down from the 20 per cent to 25 per cent it had been expecting. The group said its retail gross margin, reflecting the net profit from selling a product, would fall 1.5 percentage points from its previous expectation that it would be flat at 49.9 per cent. Asos, which has been ploughing investment into its business to drive growth, added that it would also cut capital expenditure to £200m.
In October, as Asos published its results for the year to August 2018, chief executive Nick Beighton talked up the company’s growth potential.
On Monday, in a marked change of tone, Mr Beighton commented that “in the light of a significant downturn in November, we think it’s prudent to recalibrate our expectations for the full year”.
The reversal in its fortunes, according to Asos, was partly driven by what it called the “high level of discounting and promotional activity” by rivals, which had forced it to step up its own price cuts “leading to a higher discount and continued high clearance mix”.
Asos added that while its UK trading was continuing to outperform the market, with a 19 per cent increase in the three months to November 30, compared to the same period last year, “this has been achieved at the cost of more promotional activity than initially planned and consumers buying into lower priced product”.
Analysts at Berenberg said they remained unsure whether Asos’ warning “was driven by market-wide conditions or operational issues within the business”, particularly as the retailer has been rolling out international distribution centres.
Asos also warned that UK consumer confidence, which has been hit by high personal debt levels and economic uncertainty driven by Brexit fears, was “increasingly fragile”.