It looks like a Christmas to forget for ASOS (ASC) and its shareholders, after a profit warning from one of the poster firms for the UK’s small-cap Alternative Investment Market almost slashed its market value in half.
And the carnage wasn’t confined to just one online fashion retailer. Fellow small-cap Boohoo (BOO) also slipped 10%, while Marks & Spencer (MKS) was the biggest faller in the FTSE 100, down 4%. Mid-caps JD Sports (JD.), Sports Direct (SPD) and others were also in the red.
Previously, it had been taken as a given that bricks and mortar retailers were dying, with the online disruptors set to surge. ASOS’s share price hit a record high of 7,630p in March this year, up 150% since March 2016.
But 2018 has been tough for retailers across the board, and today the string of profit warnings that has hit the sector was extended to the online players. Since that day in March, ASOS’s stock has fallen by two-thirds at 2,536p.
Despite still reporting double-digit growth in sales for the first quarter of its current financial year, the firm cut its annual outlook due to a deterioration in the key sales month of November.
Retail sales in the three months to the end of November grew by 14% to £640 million, it said, with revenue up by the same amount to £656 million with the number of orders up 16% year-on-year.
But it warned that there had been a high level of discounting and promotional activity across the market and that it had increased its own level of promotional activity.
Increased discounting, coupled with the unseasonably warm weather during the winter months, has reduced its average selling price, it added. This had not been compensated by higher units per basket.
ASOS said trading in September and October was broadly in line with its expectations, while November, a very material month for the company from both a sales and cash margin perspective, was significantly behind expectations.
“In the light of a significant downturn in November, we think it’s prudent to recalibrate our expectations for the full year,” said Nick Beighton, chief executive. Annual sales growth is now expected to be 15% instead of 20-25%.
Elsewhere, Boohoo moved to reassure its own investors, reporting that its trading performance remains “strong”. Boohoo achieved record Black Friday sales and said it continues to trade “comfortably” in line with market expectations.
But investors in retail outlets shouldn’t panic, according to Ian Forrest, investment research analyst at The Share Centre. Boohoo’s rebuttal suggests these issues are specific to ASOS, rather than widespread across the sector, he added.
But others sound more cautious tones. Joshua Mahony, market analyst at IG, notes that the “unprecedented level of discounting” ASOS reported could be the start of a wider trend towards lower margin business.
Just last week, broker Morgan Stanley sent out a scathing note on ASOS, slashing its target price for the firm by a third from 5,000p to 3,200p.
It noted that the company is burning through cash at an eye-watering rate, having spent £400 million on capex in the past two years - more than the previous 15 years put together.
Having increased its borrowing facility to £150 million, ASOS has sufficient liquidity for the near future. But, having had £173 million of net cash on its balance sheet in September 2016, the bank forecast that to turn into net debt of around £90 million by August 2020.
"ASOS could find itself uncomfortably tight on liquidity ahead of peak trading," Morgan Stanley analysts said. "Unless cash flows improve, it may have to scale back its spending and growth ambitions."
