Global online fashion store ASOS (ASC:AIM) hurries out a surprise profit warning reflecting growing promotional activity and currency headwinds. Shares in the web-based fast fashion seller slump more than 30% to £31.20, demonstrating the significant de-rating risks involved with highly-rated growth stocks.
In its third quarter trading statement, ASOS slashes its full-year operating margin expectation from around 6.5% to nearer 4.5%. This reflects a confluence of factors including slowing international sales – speaking for more than 60% of the retailer's sales and with higher profits per order – over the three months to end-May.
A strengthening of the pound has curtailed top-line progress, particularly in ASOS' Rest of World markets including Australia, Russia and China. In turn, lower margin UK and European sales have grown as a proportion of the revenue mix in tandem with heightened promotional activity, particularly in womenswear, helping to send gross margins 370 basis points lower for the quarter.
The market is disappointed with today's news, hence the sharp de-rating.
ASOS had already spooked investors with its second quarter update (18 Mar), where it revealed a disappointing sales stumble and weaker-than-expected margin guidance. Yet cool heads may point to progression across ASOS' key metrics over the quarter.
Overall retail sales grew 25% year-on-year to £243 million, still a growth rate most retailers would die for, with UK retail revenues surging 43% higher to £91.9 million and international sales still 17% ahead at £151.1 million. Chief executive officer Nick Robertson also says key metrics including active and new customer numbers, order frequency and units per basket are all in positive territory too.
With local language sites in countries including Russia, China, the US and Germany, and 8.6 million active customers, ASOS is investing heavily in order to bag long-term global market share. Significantly, investment in technology and infrastructure to support ASOS' £2.5 billion plus annual sales ambition, a new target at the time of interim results, continues to progress.
Retail sector analysts are divided in opinion. Cantor Fitzgerald's Freddie George sticks with his 'hold' rating but pares his price target from £50 to £35. 'Following this update, we are provisionally reducing our FY14 pre-tax profit by 27% to £46 million from £61 million taking EPS down to 39.0p from 52.6p and making similar revisions to our subsequent year forecasts,' says George. 'As we noted at the time of the company’s interim results at the beginning of April we remain concerned that the ranges in womenswear have been expanded beyond the levels management can adequately control. Hence, we believe the company has seen significantly higher levels of markdown activity in womenswear and higher returns.'
N+1 Singer has put its forecasts under review and writes 'this warning in relation to overseas trading and margin mix/promotions is considerably worse than the factors that preceded it, which included higher China losses and the effect of disruption and double running from the next leg of warehousing/infrastructure development. Today's news will come as a shock to many and is also worse than we had feared.'
Numis Securities, with a 'buy' rating and £60 price target, says: 'While we recognise that this update reflects a significant reset in the financial outlook for ASOS, particularly as it adjusts to a less favourable Sterling backdrop, we continue to believe that the quality of the customer proposition supports a significant global growth opportunity; investment to support this growth and drive efficiencies continues, and customer metrics are moving ahead strongly.'