It is a truism that online retailing is all about delivering, and if customers are disappointed because their shopping is delayed, players can get punished, so having efficient warehouses and distribution is crucial.
AIM-listed online fashion giant ASOS plc (LON:ASC) illustrated that lesson the hard way with its first-half results on Wednesday, reporting an 87% drop in its pre-tax profit, largely due to warehouse costs, plus a higher level of discounting, confirming the bad news delivered in a shock profit warning last December.
READ: ASOS firms as it maintains full-year guidance although first-half profits plunge on higher costs
ASOS’s total operating costs jumped by 48.3% in the first half to £635.4mln as the company opened a new warehouse in Atlanta and invested in the automation of its EU hub warehouse in Berlin. Distribution costs accounted for most of the total, rising 15.6% to £204.9mln.
As Russ Mould, investment director at AJ Bell pointed out: “The retailer’s profit has gone up in smoke after suffering hefty costs largely linked to investment in warehousing. However, the company had already warned about trading being affected by heavy discounting and fulfilment issues in the US so seeing the earnings decline in print shouldn’t be a surprise.”
He added: “The important point from today’s announcement is that life hasn’t got any worse with ASOS maintaining its 2019 earnings and spending guidance. That will come as a relief to the market.”
But, Mould continued: “The pressure is on for ASOS to sustain its reputation of fast growth and management will be hoping that the current hiccups will go away without any more shocks.”
US warehouse issues down to staffing
ASOS reported that US-billed sales increased by 80% year-on-year in the early days of its Atlanta warehouse coming on stream, which was an encouraging start before staff were overwhelmed by the volumes.
The group said Atlanta is now operational, with ASOS able to start offering improved delivery, including next day to some territories.
City Index analyst Fiona Cincotta commented: “ASOS had already announced last month that it was unable to cope with an unexpected surge in demand at its new US business.
“Today, management has revealed that the issue was related to a staffing shortage, rather limited technical capabilities.”
She added: “ASOS has since nearly doubled staff levels at its Atlanta warehouse to 1,532 but not before its customers were subjected to a four-day delay on their deliveries.
Cincotta also concluded that: “Online retailing is hyper-competitive and any more hiccups like this will be hard to forgive."
People simply spending less
Meanwhile, the challenges for bricks and mortar high street retailers were very much in focus again this week with the collapse into administration of department stores operator Debenhams PLC, however, an example of the similar pressures weighing on their online peers was provided by ASOS after its shock profit warning in December.
Sophie Lund-Yates, equity analyst at Hargreaves Lansdown pointed out: “The downgrading of full-year guidance came as a surprise, as struggling high street shops put their strife down to the rise of online shopping, and ASOS is struggling to meet that demand in some markets.”
“But,” she added, “the company’s current predicament shows people are simply spending less on goods, be it in physical or virtual shops.”
Lund-Yates continued: “However drastic today’s numbers may seem though, ASOS should now be on the right track, after what’s been a tumultuous transition period.
“With spending due to stabilise in the coming year, and the group having a better handle on its fledgling international distribution set-ups, light is now visible at the end of the tunnel.
“ASOS is still very much a growth story, and its vast customer base, and growing international proposition mean it should be able to prosper from here on in.”