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ASOS shares slump on profit warning as it succumbs to challenging retail market

"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," ASOS said

ASOS
Tough market conditions led to weakest growth in online clothing sales in recent years

Online fashion retailer ASOS plc (LON:ASC) shares plunged more than 35% as it issued a profit warning, blaming economic uncertainty and weaker consumer confidence.  

The company said it has seen a “significant deterioration” in trading in November – a key month for the group – while increased discounting and unseasonably warm weather over the past three months reduced its average selling price.

The group added that challenging market conditions had led to the weakest growth in online clothing sales in recent years.

“As a result, we have reduced our expectations for the current financial year,” ASOS said. 

ASOS now expects sales to increase 15% for the year to August 2019, compared to its previous forecast of 20-25%. The group also revised down its earnings (EBIT) margin to 2% from 3%. Gross margins are seen 150bps lower, against previous guidance for margins to be flat at 49.9%.

READ: ASOS is burning cash, Morgan Stanley says as it slashes target price

"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," ASOS said.

"There has been a high level of discounting and promotional activity across the market. We have increased our own level of promotional activity, leading to a higher discount and continued high clearance mix."

ASOS cuts spending commitments 

In response to difficult trading, the group has reduced its capital expenditure for the year to £200mln.

 ASOS said it has "significant headroom" in its existing banking facilities and continues to expect it will return to a free cash flow positive position in 2020. 

In the three months to November 30, total revenue rose to £656mln from £576.7mln a year ago with UK retail sales up 19%, European Union sales up 18%, US retail sales up 13% and international sales up 11%, offsetting a 3% drop in the rest of the world. 

However, the gross margin fell 160 basis points, hit by increased promotional activity. 

In lunchtime trading, shares were trading hands at 2,473p. 

ASOS profit warning spells trouble for rest of the sector, says analyst

“If Asos is finding it tough out there, then just about every retail stock has a problem," said Neil Wilson, chief market analyst at Markets.com.

"We knew the high street was struggling due to structural shifts, but Asos slashing guidance suggests things are even worse in the run-up to Christmas than previously thought for the sector and the strife extends well beyond the high street."

--Adds analyst interview and updates share price--

Quick facts: ASOS PLC

Price: 2910 GBX

AIM:ASC
Market: AIM
Market Cap: £2.44 billion
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