0901 Monday 17 December 2018

After we touched on the plight of the UK High St. last week, one of the of the areas highlighted for retailers struggles was the ever increasing market share that online stores have taken… well that all changed this morning as ASOS issued a profit warning and the results have been devastating.

Despite a sales growth of 14% in the last quarter, profit margins have been significantly hit as the firm had to mark down stock in what Chief executive Nick Beighton described as an “unprecedented level of discounting”. Previous forecasts had predicted a 20-25% rise in sales growth up to August 2019, however that has now been adjusted down to 15% and guidance for earnings margin fell from 4% to 2%.

Mirroring the sentiment of Mike Ashley, the firm described November as “both a sales and cash margin perspective, was significantly behind expectations” and also in line with the sentiment of Superdry last week, ASOS blamed “unseasonably warm weather during the last three months has reduced our ASP [average selling price], which has not been compensated by higher units per basket".

As trading began this morning, stock in ASOS fell by 37.29% to 2,625.00, which is way off the 7,700 valuation they held in March this year. When the news broke this morning, attention was turned to the rest of the sector and stock in BooHoo also fell 13.11% to 159.00.

Despite the drop in profit margins, ASOS’s latest results may not have been so bad, but the reductions made by the firm seem to have sealed their short term fate. This again touches on the point made by last week’s article that perhaps the business planning for the retail sector is not up to scratch.

From an investment point of view, whilst past performance is not an indication of future performance, ASOS did suffer a similar drop in share value to 1,970.00 back in 2014 and managed not only to claw their way back, but also to hit new highs. Some investors might see this as a ‘buy on the dip’ opportunity.

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