ASOS suffers after profit warning

<p>ASOS issued a profit warning today (5th June), and, investors have punished the online fashion retailer for doing so. That pain has been generously spread […]</p>

ASOS issued a profit warning today (5th June), and, investors have punished the online fashion retailer for doing so.

That pain has been generously spread to other online-only retailers – the likes of recently-public (currently down 13%).

ASOS released its third-quarter trading statement today (it was previously scheduled for next Tuesday) and its details certainly caught the market off-guard.

For the three months to 31st May, the company reported a 25% increase in total retail sales at £242m (up 33% at constant exchange rates).

Its international retail sales – which make up the bulk of the company’s revenue now at 62% – rose 17% to some £151m in the period. That contrasts to the 48% growth in the same period last year, or even the 35% growth posted in the first half of this year.

The culprit was the strength of the pound, which gave ASOS’ international sales something of a whack; on a constant currency basis, international sales grew by 28%.

Certainly, a slowdown in the company’s sales growth was widely expected, but perhaps not to that extent.

At least the company’s UK retail sales fared well, coming in at around £92m, which represents a decent 43% increase over the same period the prior year.

ASOS’ profit warning(s)…

For its current fiscal year, ASOS now expects its operating profit margin to be 4.5%. Based on its target revenue of some £1bn for the fiscal year it works out to an operating profit (aka EBIT) of around £45m.

That, according to the company, is due to the pound’s impact on its international sales (which means its lower-margin UK and European sales account for more than they did previously). Additionally, increased levels of promotional activity play a role.

This isn’t the first time for ASOS…

In March, ASOS warned that its operating profit margin for the current year would come in at around 6.5%. For context, the company’s operating profit margin last year was around the 7% mark.

ASOS said at the time that it was due to its plans to invest “at least” £68m in its warehouse and IT (previous guidance was £55m), as well as costs associated with its start-up in China.

That update saw the company’s shares suffer accordingly, closing down more than 8% on the day – today’s impact, however, is much more.

ASOS shares are down some 31% (at time of writing), bringing the total decent from a peak in February to a whopping 55%.

Is the current reaction a bit dramatic?

Well, the company’s valuation has certainly been argued time and again as sky-high, so, in the face of slowing growth and shrinking margins (at least for now), it stands to reason that the fall is equally as precipitous.

That said, it’s true that ASOS is still growing (its previous growth rate was never going to last forever) and, the dip in the company’s profitability is unlikely to persist in the long term.

But a return to the previous dizzying heights in the near term seems unlikely.

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