Shares in Asos remained down by more than 17% this afternoon (18 July) as the UK-based online fashion retailer reduced its full-year sales and profit expectations.
In its trading update for the three months to 30 June, Asos said although sales in the UK and the ‘Rest of the World’ (ROW) remained robust, in Europe and the US, revenues were held back by operational issues associated with its transformational warehouse programmes.
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Total group revenue reached GBP919.8m (US$24.7m), a 12% increase on a reported basis from GBP823.9m last year. Retail sales were also up, rising 11% in the period to GBP894m.
Its domestic arm was the biggest contributor, with a sales rise of 16% to GBP334.1m, while ROW sales climbed 14% to GBP169.5m.
However, growth in the US and EU was lower than anticipated, up by 5% and 12% respectively, as sales were impacted by operational challenges from the retailer’s ongoing warehouse transformation programmes in Berlin and Atlanta.
Execution of this programme is progressing, Asos said, however, the speed of ramp-up in its Euro Hub automation and stock build within its US Hub has been behind its “ambitious expectations”.
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By GlobalData“This has restricted product availability and range for our customers in these territories and we have seen a corresponding impact on sales as well as additional costs in support of transition,” the retailer said. “As a result, whilst visits growth across the group has shown positive momentum, sales have been held back by availability where we have seen operational challenges.”
While Asos said it is clear on the root causes, it warned these transition issues are expected to continue for the remainder of the financial year, with the retailer noting it is reducing expectations accordingly.
As a result, sales growth for the financial year is expected to be broadly in line with year-to-date performance. The impact of the lower sales, higher warehouses transition costs and costs associated with organisational restructuring are set to impact Asos’ overall profit, which is now anticipated to be in the range of GBP30m-35m.
“Whilst we are making good progress in improving customer engagement, our recent performance in the EU and US was held back by operational issues associated with our transformational warehouse programmes,” said CEO Nick Beighton. “Embedding the change from the major overhaul of infrastructure and technology in our US and European warehouses has taken longer than we had anticipated, impacting our stock availability, sales and cost base in these regions. Where we have been unencumbered by these issues we have seen robust growth and overall our customer momentum is improving with the business hitting 20m active customers globally for the first time.”
Beighton added the retailer is making progress on resolving the operational challenges and expects to complete these projects by the end of September.
“Despite these short-term challenges, the move to a multi-site logistics infrastructure will enable us to offer customers across the world our market-leading proposition, facilitate our future growth, as well as leading to longer-term efficiency benefits.”
Asos hits bump in the road
Sofie Willmott, lead analyst at GlobalData, notes the reduction in full-year sales and profit expectations has spooked investors and caused the retailer’s share price to tumble.
However, the slowdown has been attributed to operational changes, which are essential for the retailer to continue expanding internationally, she acknowledges.
“Delivering consistent double-digit top-line growth in recent years has been supported by increased warehouse capacity and improved logistics processes, and the changes being made to US and EU distribution centres are vital to facilitate long-term growth in these key markets. Asos will need to focus on winning back disappointed shoppers by bolstering its marketing efforts. Though this may need to include discounts, by recovering customers quickly they will not be lost forever.”
While no major changes have been made to UK operations, its domestic market outperformed both Asos’ total growth as well as the UK online clothing and footwear market, which GlobalData forecasts will grow 8.2% in 2019. Accelerated growth from the mature player is admirable, Willmott says, particularly with Next ramping up its branded offer and Amazon’s sights set firmly on the fashion market, alongside continued rapid growth from online value players like PrettyLittleThing.
“Asos continues to innovate and introduce new tools to drive conversion and adapt to its demanding young shopper base, such as its recently added responsible filter. However despite strong UK growth, with 62.6% of retail sales coming from international markets, a robust UK performance is not enough to protect top-line results.
“Despite another profit warning from the previously untouchable online pureplay, the future remains bright for ASOS. The retailer’s agility and willingness to change to remain relevant to its customer base will help it to continue gaining market share both at home and abroad.”
