Before the year is out, the retail sector has taken yet another blow. Rumblings of a poor Christmas trading period started to gather pace last week when Sports Direct (SPD) founder Mike Ashley warned bosses at department store Debenhams (DEB) – in which Sports Direct has a near-30 per cent stake – that high-street retailers would be "smashed to pieces" by a severe lack of demand in the run-up to Christmas. Mr Ashley warned the Debenhams board that November was "the worst on record", despite the inclusion of American-import promotional bonanza Black Friday.
In some ways, this was largely to be expected. The UK high street has had a terrible year, punctuated by a number of closures and collapses – not least House of Fraser, which Mr Ashley bought out of administration over the summer. And if bricks-and-mortar retailers have avoided collapse, it does not mean they have avoided all the pain. In the first quarter of 2018 alone, consultancy EY estimated that almost a fifth of FTSE general retailers issued a profit warning, with the number of warnings hitting a seven-year high. Cyclical and structural pressures are colliding to reshape the high street, although cost and competitive pressures – exacerbated by adverse exchange rates – are also partly to blame, it said.
This has remained the dominant theme for the retail sector in 2018, especially where high-street retailing is concerned. But the disruption caused by the internet has also presented opportunities. The popularity of e-commerce has given rise to the growth of online pure plays, the most famous of which – Amazon (US:AMZ) – continues to lead the pack. But recent events suggest that the good run seen in e-commerce stocks could be coming to an end. A shock profit warning from online fashion e-tailer Asos (ASC) took its shares down by more than 40 per cent in one day, dragging several other retail names down on the same day. Close rival boohoo.com (BOO) fell 10 per cent, despite management reassurances that trading remained strong, while high-street stalwarts such as Next (NXT) also took a hit.
As part of a first-quarter update, Asos revealed top-line growth of 14 per cent had been impacted by "a significant deterioration in the important trading month of November", as well as challenging trading conditions. The news prompted a swathe of analyst downgrades, with brokerage Liberum cutting its adjusted EPS forecast for the year ending August 2019 by 54 per cent to 53.3p. Analysts there say earnings visibility is now much lower, and that serious questions remain about how Asos is conducting its business during what should, arguably, be the busiest time of the year. A 150 basis point reduction in the retail gross margin means the group has fallen victim to serious discounting, with Liberum accusing management of not "reacting quickly enough to this threat". It highlights just how susceptible companies like Asos – despite their impressive market valuations – can be to changes in short-term trading. To avoid being left with excess capacity and unnecessary costs, Asos has also cut back its capital expenditure plans this year, lowering the budget from £250m to £200m.
The group also expects earnings to be more weighted to the second half – even more dramatically than before. Traditionally, around 70 per cent of profits have been delivered in the latter half of the financial year, but Liberum now reckons this could now rise to as much as 90 per cent.
