Shares in online fast fashion seller ASOS (ASC:AIM) slump 9.6% to £29.07 as the one-time stock market darling’s latest update reveals another quarter of slowing growth, leaving the fallen AIM giant with an uphill task to deliver against full year targets.

Causes for concern include the toughening European market, notably France and Germany, where the retailer will be cutting prices to stimulate demand, as well as the weaker than expected growth being delivered in the US.

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Following a savage profit warning in December, where ASOS flagged a sales shortfall and a halving of the operating margin amid faltering consumer confidence and a flurry of margin-crimping discounts, the pure-play online clothing retailer needed to reassure the market with its first half trading update.

The good news is ASOS leaves full year sales growth guidance unchanged at circa 15% (with retail gross margin guided 150 basis points lower due to discounting), but hitting that already-downgraded revenue growth target now hinges on the delivery of a much stronger second half.

US GROWING PAINS

ASOS reports total sales growth of 13% for the second quarter to February, but the market has grown accustomed to 25% sales growth a year from a company whose bull case centres on selling products at a rapid rate to fashion-savvy millennials. US sales growth was much more tepid than expected, up a meagre 4% in the second quarter versus a 13% increase in the first quarter.

As CEO Nick Beighton explains: ‘Our US performance was behind our plans during the period. As our Atlanta warehouse went fully online, demand far exceeded our expectations.

'Whilst very encouraging for the longer term, this caused a significant short-term despatch back log which we have now cleared. These delayed shipments will be recognised in P3 (the third quarter) and US trading is now regaining momentum. Our Rest of the World segment returned to good growth of 20% after a disappointing Q1.'

Beighton continues: ‘Our retail gross margin guidance for the year remains. We will be increasing investment in price and marketing in the second half, particularly in France and Germany.

'Given the actions we are taking together with an improving US performance, we believe the group will deliver stronger growth in the second half. Consequently we remain confident that we will meet guidance for the full year.’

THE EXPERTS’ VIEW

Russ Mould, investment director at AJ Bell, comments:

‘Life remains tough for online retailer ASOS with second quarter numbers missing expectations on several metrics. The amount of sales and the pace of sales growth are both behind analyst forecasts for the period partially as a result of difficult trading in France and Germany and disruption to US operations.

‘One could shrug these off as growing pains as the business tries to increase scale on an international basis. However, ASOS is already considered to be an established company in many circles and so some observers may not be so lenient when judging its performance.

‘On the face of it, online fashion retail is a very competitive marketplace. ASOS isn’t really doing anything unique versus its rivals and many people underestimate the fact that e-commerce can be a costly business with ongoing investment needed in technology, distribution and logistics.

‘ASOS is a fairly low margin business and so it cannot afford any hiccups along the way. For it to win at this game ASOS needs its warehouses running near to full capacity and smoothly in order to benefit from economies of scale. Its products need to stay relevant to fashion trends and it needs to excel at customer service given how many people return goods bought online.’

Referencing today’s analysts question and answer session, Liberum Capital says Beighton went to lengths to explain away ASOS’ problems across the pond, but ‘provided little data to support the variability in performance pre and post the new distribution centre (DC). While the company may disagree, it sounds to us like unfortunate execution.

‘Much work is required to support what is invariably a more capital intensive model. There are multiple pulls and pushes in the numbers with increased tax in the US, pricing investment in Europe, foreign exchange (FX) volatility in the UK.

'On the positive it seems to us the company did a good job in “kitchen-sinking” the numbers in December. However forecast visibility is low. ASOS does provide the least disclosure of all the online retailers, this surely needs to change.'

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Issue Date: 19 Mar 2019