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ASOS rout puts paid to online resilience against retail weakness

Last updated: 12:10 17 Dec 2018 GMT, First published: 11:40 17 Dec 2018 GMT

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In a trading update ASOS said its November trading had been "significantly behind" expectations

The plunge in the share price of clothing retailer ASOS plc (LON:ASC) seems to have brought home the fact that the online retail market isn’t immune to the slump engulfing the sector.

The company took a battering on Monday morning after it downgraded its forecasts for the full year amid a slump in sales growth.

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

The contagion soon spread to fellow online clothing seller Boohoo Group PLC (LON:BOO), which saw its own shares nosedive despite a swift attempt to reassure shareholders that trading was continuing as expected.

READ: Boohoo shares slide as it seeks to reassure investors amid ASOS profit warning

Given the arrival of the all-important Christmas period, many are steeling themselves against what could be a bloodbath in the new year as a slew of Christmas updates will present themselves.

“All of this is adding up to a very rough Christmas and potential carnage for the high street,” said Neil Wilson, chief market analyst at Markets.com.

“If Asos is finding it tough out there, then just about every retail stock has a problem. 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”.

Consumer confidence wane not confined to weak footfall

While the high street woes have been blamed on the burden of store portfolios as well as rising wage costs, the online afflictions seem to show that discounting and the unusual weather conditions in 2018 have also had a significant impact, factors which the online market is just as exposed to.

The performances also indicate that weaker footfall is not the only consumer behaviour declining, with general confidence also falling.

“Recent data revealed a huge decline in UK retail footfall, which it would have been easy to assume was due to online players taking share at a faster rate. These numbers show it’s more complicated and more worrying than that. It looks like consumer confidence has been knocked to the extent people aren’t spending much anywhere, be it in physical stores or online” said George Salmon, equity analyst at Hargreaves Lansdown.

Salmon added that Brexit uncertainty could also have impacted ASOS harder due to its younger demographic having “more concerns over the future of the economy post-Brexit than their parents”.

Trouble for online portals?

The difficulties online may also cause concern for struggling high street retailers, who were banking on their online portals rescuing them from declining sales.

READ: Next shares slip as sales at retail stores fall further in third quarter

One example is Next PLC (LON:NXT), which has been shifting more of its strategy toward online sales this year and seen some success with a 12.5% increase in online sales in its third-quarter results.

Institutions take a beating

ASOS’s underperformance also means Christmas will herald bad news for a number of prominent institutional investors who will be suffering from the share plunge.

One that will be feeling particularly acute pain is Danish clothing firm Bestseller, which is the firm’s largest shareholder with a 26.6% stake that today fell in value from around £933mln last Friday to £562mln on Monday morning.

“Quiet to average” Christmas ahead, says broker as “tidal wave” crashes into the sector

Christmas also looks unlikely to bring any festive cheer, with a “quiet to average” period expected by Peel Hunt analyst Jonathan Pritchard.

“It always works as a microcosm for who is communicating well and relevant to their customers,” Pritchard said, adding that there was “a tidal wave” crashing into the sector that will mean “a few boats will get sunk”.

“It’s the companies that have the good relationships with the consumer that will do best”.

In lunchtime trading Monday, ASOS shares were down 40% at 2,498p while Boohoo shares were down 15% at 155.6p.

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