Asos described Monday’s profit warning as a “bump in the road”. But investors, who saw the shares crash by almost 40 per cent, experienced severe whiplash.
The severity of the slowdown at the fastfashion retailer, whose market value peaked at £6.4bn in March, has raised questions about the confidence of Europe’s millennial consumers and the future of one of the UK’s rare e-commerce success stories.
Shares in the company plummeted to a four-year low after Asos revealed in an unscheduled trading update that sales growth would be slower than expected and that profit margins would fall from 4 per cent to 2 per cent as it cuts prices and spends more on marketing. Analysts slashed their profit forecasts for this year by up to three-fifths.
The fall is the most serious recent setback for a company that started 18 years ago copying the clothes that celebrities wore — hence the original name, “As Seen on Screen”.
Asos has had to cut prices sharply in its home market to maintain sales growth, even at a slower pace. Customers switched to cheaper items and spent less. “Average basket size is up 3 per cent. Average basket value is down 6 per cent. Those are trends I’ve not seen for the best part of nine years,” said chief executive Nick Beighton on a conference call.
Suzy Ross, a consultant at Accenture, said: “The whole of fashion retail, both online and offline, has just become so promotional.”
It is also much more competitive. When Asos floated on London’s junior market in 2001 at 20p a share, it was venturing back into a marketplace few thought was viable. Boo.com, an early online fashion retailer, had gone bust barely a year earlier. Consumers surfed basic websites with dial-up internet services.
Today, roughly a quarter of all fashion sales are made online, often via mobile devices. Domestic competitors such as Boohoo and Missguided are growing rapidly and established retailers have moved online; this year, Next’s online sales exceeded its sales from stores for the first time.
Asos’s worldwide revenues of £2.4bn are bigger than those of Sir Philip Green’s Arcadia empire, but size has brought complexity and growing pain. Flagging consumer sentiment and heavy discounting in the UK was only one reason for the warning. In Australia, a market the group entered in 2011, Asos held off Black Friday promotions as the event has traditionally not had the impact seen in the northern hemisphere. Germany and France, which between them account for three-fifths of Asos’s European revenues, were also weak.
Mr Beighton, a former finance director at discount retailer Matalan who succeeded founder Nick Robertson as chief executive of Asos in 2015, said it was “hard to pin down why” sentiment had worsened in those countries. Asked whether the group would have to rethink its Black Friday strategy, Mr Beighton said: “The benefit of hindsight is two weeks old. We need to have a good think about what we do going forward.”
The share prices of other pan-European retailers also bear the scars of heavy discounting. H&M stock fell on Monday after the Swedish fashion group boosted sales only by cutting prices. Spain’s Inditex, the owner of Zara and Pull & Bear, maintained greater price discipline but may not now achieve its full-year sales forecast.
Germany’s Zalando — a key Asos rival — warned on profits earlier this year but said it would not change its current guidance. The UK’s Boohoo, which targets younger consumers with cheaper clothes, also rushed out a statement saying sales had been in line with its expectations. Neither assurance was enough to prevent a double-digit percentage fall in Asos’s wake.
Asos has been a market darling for much of its existence. At one point in 2014 its shares were valued at more than 100 times forecast profits and before Monday, 18 of the 25 analysts who follow the stock still rated it a buy. Bestseller, the privately-owned Danish group that built up a 29 per cent stake in Asos in 2010 and is still its biggest shareholder, also remains supportive despite selling some shares this year.
But there are doubters too; about 14 per cent of the free float now is on loan to short-sellers, according to Markit data. At the start of the year, it was less than 1 per cent. Even before Monday’s fall, Asos shares were down more than 40 per cent from their March highs. Michelle Wilson, analyst at Berenberg, attributes this largely to negative sentiment towards the UK, which still accounts for a third of the group’s operating profit, but others think that investors are becoming more wary of the investment needed to maintain the growth rate.
Asos was planning to spend up to £250m a year on logistics and technology for the next few years; that has now been scaled back to £200m. “The challenge is to convert revenue growth into sustainable profit growth,” said Ms Ross.
Our ambitions have not changed. Macro trends are challenging but that will not stop us building the business that our customers want and that we want
Nick Beighton, Asos chief executive
The company’s history has not been without adversity. In 2005, an explosion at an oil terminal next to its warehouse halted business for six weeks, while the group’s distribution centres in Barnsley and Germany have also been damaged by fires. And Asos has downgraded margin guidance before, in 2014, when high levels of promotional activity and a strong pound were the culprits.
At the time, Mr Beighton predicted that margins would recover, but not to the 7 per cent levels previously forecast. They have remained at about 4 per cent ever since. This time, he is adamant they will bounce back. “I am confident that 2 per cent is a low point. I have every expectation that margins will recover and may even exceed 4 per cent,” he said.
Kate Calvert, an analyst at Investec and one of the few to recommend selling the shares, is not so sure. “I think [margins] will recover, but perhaps not to 4 per cent,” she said, citing the growing proportion of third-party brands now sold on Asos. These are less profitable than own-brand merchandise, but help drive sales and customer numbers.
But Mr Beighton was adamant that poor current trading did not change the group’s long-term aspirations, which are to increase annual revenues to £4bn and possibly more. He added that costs associated with the disruptive and risky process of moving to newer, bigger warehouses in Europe and the US would start to fall away in the second half.
“Our ambitions have not changed. Macro trends are challenging but that will not stop us building the business that our customers want and that we want.”