Share price opens drastically down as sales figures are not as strong as they could be.
Headwinds on the high street move online as growth slows at ASOS
- Following December’s profit warning, this morning’s results sees the group warn of slower growth and shares drop by double digits.
- European operations are the main cause for concern.
- While we don’t have a formal recommendation on ASOS, brave investors could look at ASOS shares given where the share price is down to.
We have known for a long time that the high street is a challenging environment for retailers but judging by ASOS’s latest quarterly update it seems that some of those troubles may be migrating to the online environment too.
The group previously warned of slowing growth in December, which saw the share price plunge, and this morning it opened down by over 10% as the three month trading update showed another quarter of slowing growth.
Sales are up, but not by enough
Group retail revenues came in at £659m, up just 13% as UK sales rose by 14% while sales in RoW bounced back by 20% after the previous quarter’s slower growth. However, the main cause for concern seems to be the tougher European environment, especially Germany and France where sales slowed down to 12%. Additionally, US sales only rose by 4% as operational difficulties were seen after a new warehouse went online but could not satisfy demand. This demand though is expected to be made up in the next quarter. Other measures were mostly disappointing too with total orders placed rising by 15%, but the average selling price, the average basket size and the average basket value all falling by 1-2%.
Low expectations confirmed
While double digit growth rates are excellent for most businesses, these are not what we have been accustomed to with “high growth” online fast fashion retailers. The December profit warning has, to a certain extent, lead us to expect less and these results are just confirmation of this. The slower growth rate cannot be put down to a maturing business as we are sure ASOS and the industry has a long way to go, but the slowdown probably is a reflection of the tougher macro-economic conditions being seen in certain regions.
We remain cautious on ASOS
The management’s statement suggests that they will increase investment in “price and marketing”, this has rings of what we have seen from high street retailers by reducing prices and discounting to lift sales. While we don’t have a formal recommendation on ASOS, we would at this stage remain cautious, but the braver investor could take a look at them given where the share price is down to.
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