A profit warning from Zalando was likely not unexpected but it will have turned up the volume on the alarm bells ringing across the online fashion retail sector.
The online German retail group, which has won market share in the UK, has told investors it is taking a “more conservative” view of its guidance for the remainder of the year – and conservative may prove to be an understatement.
Four months ago, the group expected revenue growth between 12% and 19% but it has now told the market that it doesn't expect revenue growth, with only a 3% improvement predicted in the best-case scenario.
Much of the revision came as Zalando acknowledged what many in the sector had recognised, that it can no longer be carried by the prior bounce-back in consumer confidence.
In recent weeks, investors have observed ‘cheap’ retailer Primark brush off concerns about the cost-of-living crisis as it posted boosted revenues in the year-so far.
JD Sports Fashion PLC (LSE:JD.) also announced it had doubled profits this week in its full-year results for 2021.
Before that, ASOS issued its own profit warning last week and Boohoo similarly reported falling financials, which have added yet more red flags for digital clothes retail.
Both stocks fell in response to the Zalando. In London, shares in ASOS were down 2% to 867p, while shares in rival boohoo slipped 1.88% to 58p, whereas Zalando tumbled 7% to €23.71.
In Germany, Zalando stock experienced a larger fall today, but the three companies have experienced similar share price movements in the year so far.
Zalando is down 67% since the turn of the tear, while ASOS is down 62% and boohoo, which fairs slightly better, is down 52%.
What this means for ASOS and boohoo?
According to Laura Hoy, equity analyst at Hargreaves Lansdown, “the profit warning from Zalando is unlikely to be the last in the sector,” as the cost-of-living crisis forces consumers to tighten their purse strings.
A serious cause of concern for these retailers, at least according to Hoy, is building inventory to cope with supply chain issues, only for demand to wither away.
“The post-pandemic wardrobe refresh is probably coming to an end, and the concern is that retailers who’ve been building up inventory to cope with supply chain issues will be left with piles of unsold clothing.”
“This will undoubtedly lead to more discounting, which ultimately erodes brand power and eats into margins.”
“Add to that a hesitant customer and that makes for a difficult ride ahead.”
Online retailers to be hit harder?
Both Primark and JD doled out an impressive set of financial results in recent weeks, possibly indicating that brick-and-mortar stores are hanging in. And there is some logic behind that.
As fuel prices spiral out of control, it is far cheaper to bring the customer to the product rather than send the product to the customer.
To make matters worse, ASOS noted recently a ‘significant increase’ in customer returns, which means double the fuel costs without any income.
But, according to Russ Mould, investment director at stockbroker AJ Bell, inflation and increases in the cost of living are taking their toll on retail, both physical and online.
Mould also notes how ‘pandemic winners’, like the online fashion retailers are finding it much more difficult in the real world and share-price-wise.
“The reopening of physical competition, input cost pressures and softer retail valuations mean those valuations have proved impossible to sustain.”
Zalando, ASOS and boohoo’s share prices are all down by at least 50% in the year to date.
Mould, like Hoy, also noted that a slowdown in sales can leave these companies with excess stock which will have to be discounted, eating away further from margins.
So chances are, Zalando isn’t the first and it won’t be the last to issue a profit warning as inflation hits retail.
To survive (and maybe even thrive) keeping tight control over stock levels whilst avoiding heavy discounting will be key.