Online fast fashion retailer ASOS (ASC:AIM) reported strong trading for the third quarter to June, reflecting robust growth in the UK, an acceleration in demand in the US and ‘particularly pleasing’ growth in Germany.
However, the shares slumped 14% to £40.60 after the retailer for 20-something fashionistas blamed recent downpours for a softening of sales in the final weeks of June and issued a cautious outlook accordingly.
Despite continued social restrictions, volatile demand and increased global supply chain pressures, ASOS’ group sales grew 21% to almost £1.29 billion in the quarter.
Gross margins were pressured by currency headwinds, higher freight costs caused by supply chain disruption and the high proportion of lower margin ‘lockdown’ products in the sales mix.
BLAMING THE RAIN
And yet ASOS also warned trading in the last three weeks of the quarter proved ‘more muted’, as ongoing Covid uncertainty and ‘inclement weather, particularly in the UK’, impacted market demand.
‘Blaming the weather is a poor excuse as June didn’t exactly see biblical levels of rain - and the month is often a wet one, so this year’s downpours were not out of the ordinary,’ said Danni Hewson, financial analyst at AJ Bell.
‘Plenty of people were still able to get out and enjoy the Euro football championships, so ASOS is clutching at straws with its excuses. In fact, if it was digging around for excuses, it missed a trick by not blaming the Euros for distracting shoppers.’
Encouragingly, demand for higher margin going-out and occasion wear products is returning as restrictions ease, though ASOS expects ‘a measure of volatility’ to continue near term given the rapidly evolving Covid situation worldwide.
As a result, the underlying growth rate in the fourth quarter is expected to be ‘broadly in line’ with the prior year comparable period, with returns rates normalising at an increasing rate and full year adjusted pre-tax profit is anticipated to be ‘in line’ with the £182 million called for by consensus.
CEO Nick Beighton commented: ‘Although mindful of the continued impacts of the pandemic on our customers in the short term, we believe that the structure of the global e-commerce fashion market has changed forever, which will drive an increase in online fashion sales over the long term.
‘We're excited about the size of the prize ahead of us and the opportunity of delivering on our ambition of being the number one destination for fashion-loving 20-somethings.’
THE SHORE CAPITAL VIEW
ASOS is palpably excited about its recently announced joint venture with US-based retailer Nordstrom, designed to accelerate the growth of the ASOS and Topshop brands across the pond, although Shore Capital has concerns over the tie-up.
The broker said: ‘We think the partnership will have an incremental effect for ASOS as it will increase its brand awareness in the region but see some degree of execution risk.
‘In addition, we are mindful of potential risk on the brand equity side as Nordstrom shoppers are typically in the 30-something demographics and not the fashion-forward shoppers that ASOS targets.’
