Consumer spending concerns are for the first time spreading from the high street to online retailers. AIM-listed ASOS, the popular online fashion retailer, yesterday saw its share price plunge by 40% following the release of a pre-Christmas profit warning. Despite strong 14% growth in overall sales over the three months to the end of November, the company slashed its profits forecast for the year to £52 million from forward guidance of £119 million.
The panic that set in among investors spilled over to the wider retail sector. The FTSE 350 general retailers index saw £1.4 billion wiped off the collective value of its constituents as it fell 3.74%. Home furnishings retailer Dunelm lost 10.6% from its share price and other heavy fallers included JD Sports, down 7.1%, Card Factory, down 5.6% and the Marks and Spencer share price also slid by 4.6%.
Over the past several years, online retail has been the sector’s growth story and a silver lining to the decline of the high street. Until yesterday ASOS was the biggest company by market capitalisation on the AIM alternative stock market for smaller companies. Publically listing on AIM is a less onerous and expensive process compared to a full London Stock Exchange listing. Despite the fact the ASOS has for some time had the scale to move to a full listing, the 18-year old ‘fast fashion’ e-commerce star chose to remain on the more volatile AIM. Until yesterday, the market having served it well, with its value peaking in March of this year at almost £6.5 billion. Its market capitalisation has now fallen to £2.18 billion, its lowest level in over 4 years.
ASOS chief executive Nick Beighton yesterday attributed the slump in profits to a new trend of customers favouring cheaper items when shopping. The number of items sold is actually slightly up (3%) but the overall value of ‘baskets’, e-commerce-speak for total order value, down 6%. He stated this was the first time in 9 years, since the beginning of the recovery from the 2008-09 international financial crisis, that he had witnessed such a reverse trend in consumer spending on online fashion retail.
Analysts note that the online fashion space has become considerably more competitive in recent years. On the UK market, direct online-only competitors such as fellow AIM constituent Boohoo.com and Missguided are growing quickly. Just as significantly, traditional bricks and mortar retailers like Next are also a stronger online presence. Next’s online sales are forecast to this year, for the first time, exceed in-store purchases.
It’s not just on its domestic UK market that ASOS has seen conditions deteriorate. The year has also been challenging for operations in the company’s three next largest markets of Australia, Germany and France. Perhaps worryingly for investors, Mr Beighton said the company was struggling to ‘pin down why’ these other markets have seen a drop off. However, other major online and offline retailers with a pan-European presence have had their own woes. H&M have been maintaining sales volumes by cutting prices. Zara and Pull & Bear owner Inditex, which is listed on Madrid’s stock exchange, have held on more tenaciously to its pricing model but is expected to see sales volumes having slowed as a result.
Analysts are split on the future prospects for ASOS. Some believe margins will struggle to recover to the 7% level they have achieved in the past. Currently at a low of close to 2% the company is confident that can be pushed back towards and perhaps even beyond the 4% level. Mr Beighton did yesterday remain bullish on long term growth, stating the company still expects to increase annual revenues to £4 billion from their current £2.4 billion.Risk Warning:
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