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ASOS - significant deterioration in November sees shares fall

George Salmon | 17 December 2018 | A A A
ASOS - significant deterioration in November sees shares fall

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

ASOS plc Ordinary 3.5p

Sell: 2,336.00 | Buy: 2,338.00 | Change 16.00 (0.69%)
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ASOS' has released a trading update to confirm a significant deterioration in the important trading month of November, which has in turn impacted forecasts for the year.

The group now expects underlying sales to grow by 15% this year rather than 20%-25%. Operating profit margins are set to be around 2%, rather than 4%.

The shares fell 34% on the news.

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Our view

After making impressive strides in recent years, a challenging consumer backdrop has finally tripped ASOS up.

The fortunes of House of Fraser and Debenhams are testimony to how tough retail has been recently, and a profit warning at European rival Zalando proved online players aren't immune to the issues that've plagued the sector. However, as recently as October, ASOS confirmed it expected an outlook much rosier than what we're seeing now.

That means two things. November has been abysmal, and the shares weren't priced for this kind of update.

ASOS' fall from grace comes fresh on the back of news UK high street footfall is declining at an increasingly rapid pace. Until this profit warning, it would have been easy to assume that was due to online players taking share at a faster rate. These numbers show the situation is more complicated. If anything, it's also more worrying for the retail sector.

It looks like consumer confidence is now so weak people aren't spending much anywhere, be it in physical stores or online.

The uncertainty around Brexit will be playing a major role, but sales are weak in Europe and the Rest of the World too. A common theme seems to be pricing pressure, and that implies competition is heating up.

However, there are still reasons to be positive. ASOS has proven adept at using social media to build and maintain relationships with customers, and there's no reason this formula can't continue to be successful. After all, the group only has a small share of the vast clothing markets of the UK, Europe and the US.

Still, growing the top line will require significant investment. Not only does that mean there's unlikely to be any dividends forthcoming, it should also see the cost base rise, which in turn will keep profits depressed.

Overall, we still think online fashion represents a significant opportunity, and the current challenges probably won't persist in perpetuity. But the profit warning was a major shock to the system. Not only will investors need to rebase expectations, they should bear in mind things could get worse before they get better.

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Trading details

In the three months to 30 November, ASOS delivered sales growth of 14%, or 13% once the impact of exchange rate fluctuations are discounted. That's below the 24% reported over the previous 12 months.

Weaker sales have been accompanied by a high level of promotional activity, which has seen retail gross margins fall 1.6 percentage points.

At constant exchange rates, sales in European and UK markets were up 14% and 19% respectively. However, conditions are notably more challenging in France and Germany, and UK consumer confidence is increasingly fragile.

Trading in the Rest of World segment was significantly behind forecast, with underlying sales falling 2%. While smaller than the UK and European operations, RoW sales are typically made at higher margin, so the impact on profits is significant.

Trading in the US remains in line with expectations, with sales up 13%, or 11% at constant exchange rates. The new site at Atlanta remains in testing but the group anticipates moving to 100% local fulfilment during 2019.

Capex guidance is nudged down to £200m, from £230-250m.

Find out more about ASOS shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.