Fast-fashion companies Boohoo Group PLC (AIM:BOO) (Boohoo Group PLC (AIM:BOO))and ASOS PLC (AIM:ASC) (ASOS PLC (AIM:ASC)) have both seen margins and profits take a hit.
Zalando, the German e-commerce business, is in line to be the next to report the same possibly tomorrow in its first-quarter results.
The entire sector is built on constantly churning out stock and relying on the consumer’s needs to have the ‘latest’ in fashion.
However, the model relies on shipping items quickly, and ensuring you have enough customers who want, and can afford to buy, what you’re selling.
With households under pressure to cut back on spending, and delivery feeling the squeeze of both costs and lack of freight space, it’s perhaps no surprise some of the big hitters have disappointed.
Boohoo today reported gross margins fell slightly for the year, down 1.7% to 52.5%, while profit before tax (PBT), somewhat alarmingly, fell 94%, from £177mln to £7.8mln year-on-year.
Compare that with the 2020 financials, where the company reported a pre-tax profit of £92mln.
The worry for its dwindling band of fans is what is happening to boohoo isn’t simply a reversal to pre-covid levels of trading, but a deeper underlying issue that is hitting the sector hard.
Take Asos, for example, which reported a similar story in its six-month results.
The online retailer went from a profit of £106mln to a loss of £15.8mln like-for-like.
So, what exactly is the reason for this rapid decline in performance, and is there a larger issue at hand that may spell the end of the fast-fashion boom?
What’s gone wrong?
Harry Barnick, a senior analyst at Third Bridge, said the decline in gross margins for boohoo reflects a “challenging operating environment.”
“Freight and container costs remain high and gross margins erosion is an unwelcome by-product of this challenge,” Barnick adds.
Add into that the “unprecedented rise in the cost of living,” it’s no wonder profits and margins have taken a whack, with a “cut back on fast fashion spending” a result of a tough financial environment for businesses and consumers.
All these macro conditions will certainly be impacting competitors as well.
But, as boohoo said itself, it expects external market factors, such as high shipping costs, to ease in the second half of its financial year.
That would, therefore, suggest that all the issues being experienced by fast fashion are merely temporary, and the sector simply needs to weather the storm.
Expansion at the wrong time?
Arguably one of the biggest squeezes on margins for Asos and boohoo, according to Matt Britzman, an equity analyst at Hargreaves Lansdown, is that they’ve been “struggling to service international demand.”
Reduced freight capacity, coupled with increasing costs has weighed on overall margins during the last year or so.
While shipping costs have hit most retailers, Emily Slater, an apparel analyst at GlobalData adds that online players are hit hardest as they often have to ship to international countries, exposing them to more costs.
As a result, delivery times have been long, and while boohoo has splashed the cash to get its distribution centre open in the US, and Asos turned to front-loading inventory to keep stock high, it remains to be seen whether customers will stick around for fast fashion to be fast once again.
Shein the new king?
Shein is a Chinese fast-fashion retailer that has seemingly taken over as the king of the sector.
The online fast-fashion group has been a huge threat to Western competitors because of its ultra-cheap prices that have attracted hoards of customers worldwide.
According to Barnick, Shein’s growth has added to the list of problems faced by UK companies Asos and boohoo, taking a “share of wallet from the British fast-fashion customer.”
However, Salter adds that Shein’s success should be viewed as a fact that the industry can still thrive, so as long retailers offer the right products and propositions.
That of course is easier said than done, and Asos and boohoo both undoubtedly have a difficult task of striking the right balance.
What’s the outlook?
The pandemic boom for these fast-fashion online retailers is certainly over.
But that isn’t to say that outlook is completely bleak.
Most of the issues facing the sector might indeed be temporary, but given the current geopolitical and economic climate it’s difficult for anyone, even boohoo, to say when conditions will get better.