ASOS looks for quick fix, and Barratt ambitious on margins

“Raised tensions between the US and China over Hong Kong helped renew fears over the trade relations between the two economic powerhouses and led to subdued investor sentiment on Wednesday,” says Russ Mould, AJ Bell Investment Director.

“Sterling slipped back amid concern over the fate of a possible Brexit deal and this boosted the overseas earners on the FTSE 100, helping the index trade flat early on."

ASOS

“A rise in sales and a fall in profit tends to suggest there is either something wrong with how the business is run or its growth journey is incurring large costs. One could suggest both apply to ASOS which is finding its global expansion slightly problematic, having just reported a 68% slump in full-year pre-tax profit.

“Although a sharp drop in earnings and a sharp rise in net debt make for ugly reading, this is arguably old news. Investors are now bidding up ASOS’s shares because management are confident they have a solution to fix operational issues.

“ASOS needs to ensure two things are working in its favour. First, it needs to sell products that are in fashion and consumers actually want to buy. Second, the business has to be running smoothly which means its warehouses have adequate stocks, are sending products out quickly, and returns are being handled efficiently. You may think that sounds fairly easy, but anyone working in retail will tell you otherwise.

“ASOS has spent a significant amount of money to support its global expansion so it now needs to ensure it can make a good return on this investment.

“Plans to double the number of people in the business with ‘chief’ in their title shows it is serious about being better organised and having stronger leadership. Its announcement also contains lots of detail about how it will strip out costs and improve logistics, tech and other aspects of the business.

“This all sounds very encouraging but the proof will be in the execution. ASOS has issued profit warnings, been punished by the market and is now going tail between its legs saying it will try harder. That’s given it some breathing space to get things back in order, but failure to drive profits back up, and at a decent pace, will mean shareholders won’t be so forgiving next time.”

Barratt Developments

“Recent updates from the housebuilders have strongly hinted that this is as good as it gets for the sector. But you would not necessarily guess as much reading today’s trading statement from Barratt Developments.

“Industry margins are under pressure as house prices stall at the same time as building costs are going up and there are also signs purchasers are using the current uncertainty to haggle more on price or looking for higher specification features in their homes.

“Yet Barratt is still talking about achieving ‘margin improvements’, crucially without compromising quality – or in other words without building lower calibre houses.

“Either Barratt has found an approach that has eluded its rivals or it seems likely shareholders will face disappointment at some stage.

“Particularly if there is any change in the extremely benign market conditions, with high levels of employment, low interest rates, easy availability of mortgages and the Help to Buy scheme continuing to provide support on the side. Brexit is also a key uncertainty for Barratt and its peer group.

“Elsewhere sales momentum remained fairly strong in the first quarter, with sales rates ticking up, although the order book was flat and unit sales are only expected to grow at most 3% in the year to June 2020.”

These articles are for information purposes only and are not a personal recommendation or advice.