Pure-play online fashion brand ASOS (ASC:AIM) slumped 12.3% lower to £24.07 after posting its second profit warning within a year.
Bringing forward its third quarter trading statement from the originally slated date (23 Jul), the one-time AIM darling blamed growing pains arising from its ongoing warehouse transformation programmes in Berlin and Atlanta for this latest confidence-damaging downgrade.
WHAT’S BEHIND THE LATEST WARNING?
Following on from a first punishing profit warning coughed up in December, the fallen fast fashion seller’s second earnings alert sees it downgrade full year sales growth expectations from 15% to 12% with gross margin also guided lower.
Pre-tax profit is now expected to be in the £30m to £35m range. That is significantly down from previous forecasts of £55m and factors in warehouse transition and restructuring costs.
READ MORE ABOUT ASOS HERE
ASOS’ total retail sales grew by 11% in the four months to 30 June with UK sales up 16% and the rest of the world segment showing robust growth of 14%. Disappointingly however, sales in Europe and the US were held back by warehouse operational issues and poor stock availability, with sales growth of just 5% and 12% respectively. These issues will rumble on for the rest of the year to the detriment of sales and earnings.
Not having stock available reflects poorly on ASOS and investors are marking the shares down heavily again today, many no doubt aware of the old stock market adage that profit warnings come in threes.
BEIGHTON’S TAKE
Here’s what ASOS’ under-pressure chief executive officer Nick Beighton said:
‘Embedding the change from the major overhaul of infrastructure and technology in our US and European warehouses has taken longer than we had anticipated, impacting our stock availability, sales and cost base in these regions. Where we have been unencumbered by these issues we have seen robust growth and overall our customer momentum is improving with the business hitting 20m active customers globally for the first time.’
Beighton insists: ‘We are clear on the root causes of the operational challenges we have had, are making progress on resolving them, and now expect to complete these projects by the end of September.’
THE ANALYSTS’ VIEW
Shore Capital said ‘the UK performance is relatively robust but clearly the warehouse transition in both Europe and the US have seen significant growing pains in recent months, which in our view, have been self-inflicted by the company.’
Liberum Capital warned the operational issues in Europe and the US ‘signal to us a lack of enough senior leaders in the business with the adequate skill-set in the business to undertake the complex capital projects ongoing.’
Scathingly, the broker added: ‘Considering the £700m-plus capex that has gone into the business since 2015, and despite the fact that sales has more than doubled over that time period, we question where £1.5bn of additional sales have gone considering profits are now circa £20m lower than 2015.’
Meanwhile Russ Mould, investment director at AJ Bell, explained: ‘Having a strong brand is not the only key factor to prosper in the world of online retail. You also need the ability to manage the day-to-day business including flawless execution of warehouse operations, having enough stock, and maintaining superior customer services.
‘ASOS’ glory days now seem a distant memory given how it has reported yet another profit warning. It is certainly failing on the operational front with a continuation of warehouse problems and stock availability.
‘Fashion fans have plenty of places from which to buy clothes and so ASOS is at risk of losing out to the competition if it cannot fix its problems fast. We live in an impatient world where so many people want something in an instant. If ASOS doesn’t have the stock ready to ship then consumers will simply go elsewhere.
‘Operational issues are also bad for its reputation as consumers lose trust in a brand if they cannot get what they want, when they want.’
