ASOS PLC (LSE:ASC)’s decision to cut its annual sales and profit guidance, on the back of rising consumer returns and associated supply chain costs, may be evidence that the e-commerce bubble since the start of the Covid-19 pandemic is fading, analysts say.
“It looks like e-commerce was in a bubble driven by a massive shift in spending from services to goods,” Saxo Bank’s head of equity strategy Peter Garnry said in a statement today, noting that e-commerce stocks have fallen 66% over the past year and have lost ground gained during the first phase of the pandemic.
“When we look at the performance 2016 in our e-commerce basket it looks as if the entire industry went into a bubble caused by pandemic."
Financial results from online retailers Asos and Boohoo PLC this week suggest that the outlook for fashion e-commerce could be “deteriorating” as a result of the cost-of-living crisis.
Investment bank Liberum was one brokerage to slash its price target for Asos following the retailer's profit warning yesterday, cutting the price at which its analysts believe the retailer’s shares would offer fair value by 40% to 900p.
Its analysts said the downgrade reflects "uncertainty around the long-term profitability of the business model".
Not everyone is convinced that Asos’s struggles stem directly from the hit to online retail as a result of inflation and a mass return to the office.
“We are not overly convinced a more cautious consumer is what has led to the deteriorating performance,” Liberum said in the analyst note.
Instead, some analysts blame over-stocking and possibly “the wrong stock at the wrong price” at the retailer, saying its choice to open new stores may be behind its recent profit warning.
They warned today of a potential snowballing in the company’s gross margin decline, which could “reach a new low this year”.
Asos reported flat growth in the third quarter on a constant currency basis, reporting an increase in customer returns in the UK and Europe yesterday.
On the positive side, the retailer has appointed its former chief commercial officer José Antonio Ramos as its new chief executive following a hunt to replace its former CEO since his exit last year, but it had reportedly sought to hire eBay’s European arm head Rob Hattrell.
Its new lower pre-tax profit guidance of £20mln to £60mln is a wide range, reflecting the unknown quantity of customer returns on warehouse and delivery costs, as well as the cost of labour to clear returned stock.
The bottom range of its latest guidance would represent no improvement from April as well as weakening gross sales, while the upper end would continue May’s improved demand.
Some analysts, such as those at Liberum, predict the retailer may even fail to reach the lower end of its profit guidance, saying any new growth would need to depend on promotions.
“The current valuation at 0.3x forward sales is optically low but earnings visibility is clearly non-existent,” Liberum said in the analyst note.
“No need to own the shares but some may feel it is too late to sell, so we remain HOLD at a lowered 900p TP.”