LONDON (ShareCast) - (Sharecast News) - Shares in online fashion retailer Asos tumbled on Monday as it joined in the retail gloom, downgrading its guidance for the year as weaker trading in November and heavy discounting took their toll.
In an unscheduled trading update for the three months to 30 November, the company said that while it delivered "solid" sales growth of 14% to £656m, November - a material month for the group from both a sales and cash margin perspective - was "significantly" behind expectations.

Asos also highlighted a high level of discounting and promotional activity across the market and said it had increased its own level of promotional activity.

"This increased discounting, coupled with the unseasonably warm weather during the last three months has reduced our average selling price which has not been compensated by higher units per basket. Consequently, average basked value is now lower year on year. This has driven higher variable costs through both our distribution and warehouse cost lines.

"All other operating cost trends remain largely in line with expectations. We remain in a period of heavy transition costs which this year remain budgeted at a peak level of circa £30m. This drag on our profitability will decrease during the second half of the current financial year."

The company said the current backdrop of economic uncertainty and weakening consumer confidence had led to "the weakest growth in online clothing sales in recent years". As a result, it cut its sales growth guidance for the year to August 2019 to around 15% from 20-25%, while its EBIT margin expectations were reduced to 2% from 4% and the company said it would cut capital expenditure by £200m. Meanwhile, the group said retail gross margin would drop by 1.5 percentage points during the year compared to previous guidance that it would be flat at 49.9%.

Chief executive officer Nick Beighton said: "We achieved 14% sales growth in a difficult market, but in the light of a significant downturn in November, we think it's prudent to recalibrate our expectations for the full year. We are taking all appropriate actions and our ambitions for Asos have not changed."

Total retail sales in the first three months of the financial year were up 13% to £640m, with UK retail sales up 19% to £237.1m, but at the cost of more promotional activity than originally planned. EU retail sales were 18% higher at £203.8m, while in the US they rose 13% to £85m and Rest of World sales were down 3% to £114.1m. International retail sales increased 11% during the period to £402.9m.

At 1015 GMT, the shares were down 40% to 2,498.05p, while rival Boohoo was 11% weaker at 162.70p and Quiz shares were down 16% at 28.50p.

Neil Wilson, chief market analyst at Markets.com, said: "If Asos is finding it tough out there, then just about every retail stock has problem. We knew the high street was struggling due to structural shifts, but Asos slashing guidance suggests things are even worse in the run up to Christmas than previously thought for the sector and the strife extends well beyond the high street. Still it achieved 14% sales growth over the reported period in a very tough market - the bar was set very high for Asos."

George Salmon, equity analyst at Hargreaves Lansdown, said: "After making impressive strides in recent years, a challenging consumer backdrop has finally tripped Asos up.

"The fortunes of House of Fraser and Debenhams are testimony to how tough retail has been recently, and a profit warning at European rival Zalando proved online players aren't immune to the issues that have plagued the sector. But this news has still caught the market off-guard. As recently as October, Asos confirmed its confidence in an outlook much rosier than what we're seeing now.

"Recent data revealed a huge decline in UK retail footfall, which it would have been easy to assume was due to online players taking share at a faster rate. These numbers show it's more complicated, and more worrying, than that. It looks like consumer confidence has been knocked to the extend people aren't spending much anywhere, be it in physical stores or online. The uncertainty around Brexit will be playing a major role, and it's probably no coincidence Asos' key demographic of twenty-somethings generally harbour more concerns over the future of the economy post-Brexit than their parents."

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