- ‘Uncertain’ buying patterns and higher returns hurting ASOS
- Boohoo reports first-ever UK sales decline
- Chinese competitor Shein gobbling up market share
Shares in fast-fashion rivals ASOS (ASC) and Boohoo (BOO:AIM) slumped after the former delivered yet another profit warning and the latter reported a weak start to its 2023 financial year with news of its first-ever sales decline in the UK market.
Both online clothing retailers are feeling the squeeze from soaring costs at a time when cash-strapped shoppers are cutting spending on non-essential clothing and more young fashionistas are sending products back.
ANOTHER ALERT FROM ASOS
In an unscheduled update, ASOS reported year-on-year group sales growth of just 4% for the third quarter to 31 May 2022, well below the growth needed to meet previous full year guidance amid a surge in costly product returns as consumers grapple with inflationary pressures.
ASOS’ shares plunged 27.5% to a 12-year low of 840.5p on a warning adjusted pre-tax profit for the year is now expected to be in the £20 million to £60 million range, well below consensus of £92 million.
The retailer pinned the massive downgrade on ‘uncertain’ consumer buying behaviour and the potential continuation of higher returns, with full year sales growth seen at between 4% to 7%.
Lower profitability and higher stock levels are having a knock-on impact for cash generation for ASOS too. Instead of the £93 million net cash position forecast by analysts, ASOS now expects to end its year with net debt of between £75 million and £125 million.
ASOS has at least finally ended its search for a new CEO after appointing Jose Antonio Ramos Calamonte to the hot seat and lifted non-executive director Jørgen Lindemann to the role of chair.
COMPETITION BITES BOOHOO
Shares in Boohoo were marked down 18% to a five-year low of 53.2p after the Manchester-based retailer delivered news of muted trading in the first quarter to 31 May.
Group sales were down 8% year-on-year, a below consensus result driven by a first-ever sales decline in the UK, where broker Liberum believes Boohoo is losing share after two years of significant gains.
Having warned of slowing revenue growth and higher operating costs last month, Boohoo also disappointed investors with news of a huge 28% quarterly sales decline in the US, where aggressive Chinese ultra-fast fashion retailer Shein is gobbling up market share.
Boohoo’s gross margin declined by 220 basis points to 52.8% as the digital retailer continued to invest in shoring up market share won during the pandemic.
In terms of the outlook, there was no change to guidance for the year to February 2023, with Boohoo still predicting low single-digit sales growth with an adjusted EBITDA margin of between 4% and 7%, though this is well below Boohoo’s historical margin of 10%.
THE EXPERT’S VIEW
Commenting on ASOS’ latest profit warning, AJ Bell investment director Russ Mould said: ‘What a day for Jose Antonio Ramos Calamonte to be appointed chief executive. There will be no fanfare and celebration, instead he gets to deliver terrible news on the first day in the job. Given that it’s an internal promotion, he won’t be surprised by the state of the business having worked for ASOS since January 2021.
‘It’s all change at the top for ASOS with a new chair as well, with Jørgen Lindemann being appointed. Investors will be hoping for some fresh thinking in the boardroom, particularly as the share price has fallen by 80% in the past 12 months and now sits at a 12-year low.’
Mould explained Boohoo is pinning its hopes on people buying new outfits for their summer holiday, though this might not be the big payday it expects.
‘The squeeze on people’s finances means that many people won’t be able to afford to go away this summer and so they may be content with their current wardrobe if the most exotic thing they’ll do is sip piña coladas from their deckchair in the garden.
‘Boohoo’s latest sales figures show how tough life is for fashion retailers. Revenue is down 8% over three months with overseas operations continuing to struggle with delivery delays.
‘Unfortunately, life could get even worse for ASOS and Boohoo, as countless consumer-facing companies are experiencing reduced demand.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.
