Fashion retailers ASOS PLC (LSE:ASC) and Boohoo Group PLC (AIM:BOO) endured a tough 2022, but the long road to recovery may have already begun for the pure online players.
The last 12 months were dominated by the cost-of-living crisis, soaring inflation and changing consumer habits post-pandemic, culminating in profit warnings and falling share prices.
ASOS nosedived 72% in the last year, while competitor boohoo saw shares fall by 64% over the same period.
However, 2023 might provide some form of respite, with some City analysts believing things are starting to get better despite the doom and gloom that still lingers.
One significant headwind important to all retailers already on its way down is freight costs.
Next highlighted this in its trading update last week when it said cost pressures are easing thanks to falling shipping rates.
Freight costs, which peaked at roughly US$15,000 per forty-foot container around July according to data from logistics company Freightos, forced retailers into assessing their pricing models.
Some, such as Next, decided to raise prices in line with inflation, while others such AB Foods-owned Primark froze prices (after a small increase).
A reduction in freight costs will not only lead to a significant ‘cost of business’ expenditure becoming considerably cheaper but could also facilitate retailers clawing back on their prices.
The benefit of this, of course, is that the prices become more accessible for the end consumer at a time when household budgets are strained.
Aside from inward freight costs, outward delivery (and return) costs also caused the online players a headache as sky-high petrol prices made the process much more expensive.
Return rates in particular caused mayhem, with the number of items sent back ballooning as consumer habits shifted from leisure wear during the pandemic to dress and formal wear as the hospitality sector opened once again
Boohoo pointed to high return rates as a reason for a fall in sales and profits in its first-half results.
However, as John Stevenson, a retail sector analyst at Liberum notes, return rates in the upcoming year should look favourable, at least on a comparative basis.
This is largely due to a normalisation of return rates, given the products that “favour higher return categories like dresses” were on the top of shopping lists as pandemic restrictions eased.
Declining petrol prices (below £1.50 per litre for the first time since Russia invaded Ukraine) should also help ease the financial burden associated with processing returns.
So, all problems solved?
Not really. Aside from macro problems such as the cost of living crisis, each individual player will have their own internal issues to manage.
Notably, ASOS is in the process of writing off up to £130mln worth of excess stock while boohoo struggles to shake its reputation for poor working conditions at its warehouses.
Easing cost pressures and normalisation of returns is just the first step in the right direction on the long road to recovery for online apparel.