Shares in retailers sold-off heavily on 17 December as online fashion retailer ASOS (ASC:AIM) issued a shock profit warning, cutting its annual sales growth and margin forecasts amid a fall in consumer confidence and a flurry of margin-crimping discounts.

Sector sentiment had already been rocked by Sports Direct International (SPD) owner Mike Ashley’s comment last week that the high street is at risk of being ‘smashed’ by weak spending following an ‘unbelievably bad’ November.

However the earnings alert from online pure play ASOS confirmed fears pre-Christmas trading – for some at least – is even worse than thought and the high street crisis is spreading online.

WHAT’S GONE WRONG FOR ASOS?

While September and October trading was broadly in line for ASOS, November which is a key month including Black Friday was ‘significantly behind expectations’.

The AIM giant also warned of the current backdrop of economic uncertainty across many of its major markets including France, Germany and Australia, together with a weakening in consumer confidence, has led to the weakest growth in online clothing sales in recent years.

Accordingly, ASOS not only cut its year to 31 August 2019 sales growth guidance from a 20% to 25% range to circa 15%, but given unprecedented levels of discounting, not helped by unseasonably warm weather, downgraded operating profit margin guidance from 4% to 2%. Full year capital expenditure was also guided from a range
of £230m to £250m, down to £200m.

Chief executive Nick Beighton said: ‘We achieved 14% sales growth in a difficult market, but in the light of a significant downturn in November, we think it’s prudent to recalibrate our expectations for the full year. We are taking all appropriate actions and our ambitions for ASOS have not changed.’

In a call with journalists, Beighton conceded he may have to re-think ASOS’ approach to margin-eroding Black Friday. ‘It is too early to conclude, but I will be looking at that going forward,’ he explained.

IS IT A MARKET OR ASOS-SPECIFIC ISSUE?

Ironically, November was a record sales month for ASOS, albeit significantly behind management’s lofty expectations, and Beighton believes this is a market rather than an ASOS-specific slowdown. ‘I actually feel the overall level (of spending) has dropped,’ he explained.

Among ASOS’ 20-something demographic, he said it is about more than Brexit. ‘It is a weakening in consumer confidence. Consumers are spending less and the biggest trend we’ve seen is the substitution effect towards lower priced items.’

Broker Numis agrees, insisting that key performance indicators and management commentary point to market rather than model challenges.

Research group Edison believes the significance of the warning by ASOS ‘could hardly be higher for the consumer sector’. It adds: ‘Coming at the end of its first quarter, it entails a substantial judgment call for the rest of the financial year – a call that management has made negatively.’

WHAT ARE OTHER RETAILERS SAYING?

The ASOS profit warning has followed gloomy statements from fashion retail rivals in recent weeks. Foods-to-fashion group Associated British Foods (ABF) sent a chill wind through the high street with its comment (7 Dec) that ‘during November Primark trading was challenging, in a tough retail market’.

Out-of-favour outerwear specialist Superdry (SDRY) warned (12 Dec) there is ‘still considerable uncertainty in terms of the weather outlook, the changing shape of consumer behaviour in the peak trading period and the impact of wider economic and political uncertainty’.

And Bonmarche (BON) even cautioned (13 Dec) ‘the current trading conditions are unprecedented in our experience and are significantly worse even than during the recession of 2008/9.’

BooHoo (BOO:AIM) bucked the trend by saying (17 Dec) that its trading performance remained strong, that it had enjoyed record Black Friday sales, and that it continued to trade in line with market expectations.

Investors may now be wondering if it is simply down to some retailers no longer being fashionable and appealing to a broad set of customers.

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