It was more bad news at Asos (ASC) this week as its shares slumped 10 per cent following yet another profit warning. Investment in international pricing and proposition, as well as logistics and technology means pre-tax profit for the 2015 financial year is now expected to be flat on 2014. That reflects a 30 per cent downgrade to consensus expectations.
Shares in Asos have shed nearly 70 per cent of their value since hitting an all-time high in February, plummeting to 2,205p. So what's gone wrong? Well, a number of things. Earlier in the year Asos was forced to increase and bring forward investment spend in its global logistics network to cope with faster-than-expected growth. It's also funding start-up costs in China, where it won't turn profitable for another four years. Machinery upgrades at the distribution hub in Barnsley have added to warehouse labour costs per unit, which will be incurred into the first half of the current financial year. To make matters worse, a fire in June burned £25m to £30m off sales. Although covered by insurance, management reckon it knocked 200 basis points off the gross margin, bringing the total decline to 640 in the fourth quarter and 230 for the full-year.
Topping it all off, sterling's appreciation against various currencies has impacted international sales. In the final quarter, total revenue growth 'slowed' to 15 per cent across the group, with flat sales in the US and a 5 per cent fall in the 'rest of the world' division, mainly driven by currency headwinds. EU sales were, however, up by a fifth and UK retail sales by a third.
Temporary though it may be, Asos is nonetheless suffering a serious setback. Despite having achieved 30 per cent sales growth in the year to August and £45m of pre-tax profit, investors expect Asos to seriously outperform to justify its lofty rating. Any whiff of a slowdown, and the shares take a hit. Given the challenges ahead, we move our view to a hold.
