ASOS plummets by over 30% as margins deteriorate

Shares in online fashion retailer, ASOS,  targeting the  “twentysomethings” dropped as much as 42% first thing this morning and are now trading down over 31% to £31.22 after a profits warning caused by weaker than expected international sales and continued problems in China. Increased promotions and lower sales from abroad also hit its selling margins. The latest warning comes after after announcement in March that warehousing costs and its entry into China would hit margins and earnings meaning its shares are down around 54% in the last 3 months. ASOS previously reported a 22% fall in in pre-tax profit in the six months to the end of February compared to the same period last year.

The company’s shares traded at nearly £72 in February and at the current £31 ASOS has a market cap of £2.5 billion.

Although third quarter retail sales rose by 25% in the 3 months to May 2014 and active customers rose by over 30% to 8.3 million, Asos now expects to make a profit of £45 million this year against previous expectations of £65-66 million. UK sales rose 43% but international sales growth dropped to 17% with the stronger pound being blamed for products seeming more expensive for foreign customers. The company cut its EBIT (earnings before interest and tax) margin target from 6.5% to 4.5% from 6.5% a year ago.

After seeming like the hero for so long with an exceptional track record of revenue growth, Nick Robertson, chief executive, now has plenty to worry about with the lower than expected international sales and gross margin pressures.

With a price/earnings ratio of around 90, ASOS is the classic example of a high growth momentum stock with much expectation built into the share price driven by the growth in the global online clothing market and the hot internet retailer sector. The hiccup in March has been compounded by today’s revelations and the market did not take kindly to the broken promises with the market cap falling by well of £1 billion. There seems to be plenty of upside potential for the company given the move to online away from high street clothing but today is a serious reality check and it seems like it will take a long time for the shares to recover their all time highs of over £70 particularly if the wider market catches a cold. I’m sure many institutions are thinking, once bitten twice shy!

Contrarian Investor UK

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