Footasylum PLC (LON:FOOT) disappointed the markets this morning with its guidance for the year ahead, sending shares in the trendy athleisure retailer tumbling.
The AIM-quoted firm said it will pour more money into its consumer offering ahead of its peak Christmas trading season, while it also plans to invest heavily into store upsizes and the opening of new sites.
Short-term pain
“This will have an associated increase in both expected capital expenditure and property costs for the current year and as a result, we now anticipate that, adjusted EBITDA for FY19 is likely to show more modest growth than in FY18,” said chief executive Clare Nesbitt.
The investment is not what investors signed up for at the float back in November. They will have wanted to see the top and bottom lines grow substantially over the coming years in order for Footasylum to justify its punchy valuations.
READ: Footasylum stumbles on profit warning
But analysts seem to agree that underlying earnings (EBITDA) are likely to be around 12% lower than expected this year, while pre-tax profits are expected to be almost 25% behind original forecasts.
House broker Liberum was one of those to trim its estimates. It now expects Footasylum to record a pre-tax profit of £7.5mln for the year, down from its previous prediction of £9.6mln.
Unsurprisingly, the downgraded guidance has hit what was thought of a growth stock pretty hard. Shares are down 50.8% to 82.4p in early afternoon trading.
Long-term gain
But Liberum analyst Wayne Brown, despite his disappointment at having to cut his figures, reckons the increased investment will pay off over the longer-term.
“Footasylum is investing for growth in areas where there is a more predictable rate of return,” said Brown.
“The focus on more store upsizes is sensible as this aligns its strategy with the brands it retails but should also ensure a more predictable payback on capital spend.
“While all this means higher capex, depreciation and rent in the short term with a modestly longer burn to greater sales growth, it is sensible in light of the structural shifts in the current market place.”
Brown adds: “Footasylum remains a high growth business, is investing wisely and the story remains very much intact, though it is clearly disappointing to be cutting numbers by 25%.”
Guidance not the only issues though …
Although Brown is confident in the future, others in the market have suggested issues other than guidance are arguably more concerning.
The likes of Nike and Adidas – two key brands for Footasylum – are focusing more and more on their direct-to-consumer sales.
They have already been culling their retailer lists and that trend is expected to continue, and market sources reckon only a handful of global players will be allowed to stock their gear.
JD Sports Fashion PLC (LON:JD.) – the company also founded by Footasylum’s founder, David Makin – is thought to be one of those that will make the cut, especially after its US$550mln acquisition of US retailer Finish Line.
Footasylum could miss out though and have its access to the latest product lines restricted over time.
Social media faux pas
Given that its core target market is the 16 to 24 age bracket, a strong social media presence is vital.
Some market insiders have been less than impressed with Footasylum’s attempts on Instagram and Twitter, noting that engagement with its customers remains poor.