- Downbeat 2023 outlook could send the shares south
- Ballooning stock levels are a big concern
- Analyst says ASOS in a ‘precarious’ position
Investors in ASOS (ASC) are nursing a year-to-date loss of 78%, shares in the online fast fashion retailer having fallen from just under £24 at the start of 2022 to 527p on negative newsflow.
Now, the fear is ASOS stock could come under further selling pressure next week when the troubled digital retailer delivers its full year results (19 October).
Online stocks, among them ASOS, Boohoo (BOO:AIM), AO World (AO.), N Brown (BWNG:AIM) and Made.com (MADE), have been savaged this year as pandemic-induced market share gains fade and sales weaken as the worsening cost-of-living crisis squeezes consumer spending.
Purveyors of cheap online fast fashion, which possess limited pricing power and target a 20-something demographic being hammered by the rising cost-of-living, have been particularly hard hit as cost inflation and higher return rates eat into their already-tiny operating margins.
WHY HAVE ASOS’ SHARES CRATERED?
ASOS has suffered a series of earnings downgrades driven by inflationary cost pressures and weakening sales growth as youthful fashionistas pull in their horns.
On 9 September, ASOS confirmed it saw weaker than expected sales in August as inflation impacted shoppers’ purchasing power and bemoaned ‘a slow start’ to the Autumn-Winter selling season.
Ahead of next week’s numbers, the online retailer has already guided for full year 2022 pre-tax profits towards the lower end of the previously communicated £20 million to £60 million range.
Yet as Shore Capital explains, ‘all eyes will be on the full year 2023 outlook’. For the year to August 2023, the broker forecasts muted top line growth of just 2.4% and a modest uplift in pre-tax profits to £22 million, some 60% below consensus.
Shore Capital’s downbeat worries that consumers will continue to be affected by the cost-of-living squeeze and ASOS’ offer will come under further pressure.
IS FAST FASHION DOOMED?
‘Inventory build-up is a concern for the sector across the board, but especially for ASOS as the company swings into a net debt position and taps into the cash raised with the convertible bond, now out the money’, says the broker, which has a ‘sell’ rating on ASOS.
But while many investors think the fast fashion model is doomed, Shore Capital’s Eleonora Dani stresses the online channel is ‘simply back to its trajectory after the abnormal growth, and its penetration is still expected to increase over the years’.
COULD NORDSTROM BUY EMBATTLED ASOS?
Dani says ASOS is in a ‘precarious position’, with finance director Mat Dunn off to join Gymshark ‘at a time when a tight financial grip is most needed’ and with LVMH’s (EPA:MC) Sephora ‘entering the UK once again in October through the acquisition of Feel Unique’, which has seven times as many prestige beauty brands as ASOS.
The analyst also thinks that given the weakening pound, ASOS could become a bid target, with US department store and ASOS strategic partner Nordstrom (JWN:NYSE) a potential buyer of the embattled business.
Dani notes recent deals in the sector have involved ‘legacy brick and mortar retailers acquiring or investing in online pure players’.
She points out that last week ‘Austrian home retailer XXXLutz acquired German online pure player Home24 and luxury conglomerate Richemont (CFR:SWX) appears on track to buy 25% of online pure player Farfetch (FTCH:NYSE) in five years.’
