5th Jun 2014 08:50
LONDON (Alliance News) - Online fashion retailer ASOS PLC Thursday lowered its profit guidance for the current financial year and next year, after saying it was hit by heavy discounting and sterling strength, which it said took a big chunk out of its international business.
ASOS shares dropped 44% on the warning to a 52-week low of 2,529.00 pence soon after at the open, dragging down with it the whole AIM All-Share index, of which it is the dominant constituent. The shares are currently quoted at 3,120.00 pence, down 31%.
Finance Director Nick Beighton told journalists Thursday full-year profits will fall to around GBP45 million, compared to its previous profit guidance given in March of around GBP63 million to GBP65 million. ASOS also lowered its profit expectations for the next financial year, saying it was "resetting its expectations".
"The strength of sterling is the new norm. As a result we are working on re-deploying investment back into lowering prices. The market was expecting a EBIT level of around 7% next year, but we are softening that trajectory to around 5% to 6% next year," said Beighton.
ASOS reported good sales growth in the UK and Europe in the three months to May 31, with sales growth of 43% in the UK and 37% in Europe, but said that a huge slowdown in international sales, which slowed to 17% growth from a huge 48% in the third quarter last year, and lower retail margins were hit by sterling strength and increased promotional activity.
Total retail sales for the group rose 25% at actual exchange rates and 33% at constant currency to GBP243.0 million up from GBP193.6 million for the same period a year earlier. Total retail sales registered growth of 45% this time last year.
"The resultant higher mix of UK and European sales, with lower retail margins, together with increased levels of promotional activity, leads us to reduce our EBIT [earnings before interest and taxes] margin guidance to around 4.5% from around 6.5% for the current financial year," said Chief Executive Nick Robertson.
ASOS said its gross margin in the third quarter declined by 370 basis points - meaning 3.7 percentage points - due to higher promotional activity and more sales coming from UK and Europe compared to sales from higher-margin international markets, such as Australia, Asia and Russia.
Going forward, ASOS said it is expecting similar sales growth rates in the fourth quarter of its current financial year with a slightly softer gross margin decline.
"Unfortunately the final quarter of last year was a real soft spot for us, so we are up against some tough comparatives," said Beighton.
International sales, which represent around 60% of the group's overall sales, slowed to 17% growth in the third quarter to GBP151.1 million, compared to a solid 48% sales growth in the same quarter of last year, while, within that, rest of world sales grew a mere 1%, hit by currency appreciation and market weakness in Russia, Asia and, in particular, Australia. In stark contrast, rest of world sales grew 38% in the same period last year.
Australia used to be the biggest international territory for the group, Beighton said, but is now only the third biggest, having fallen in the last six months due to stronger growth in the UK and European zone especially in Germany, France, Denmark and even Ireland.
In the UK retail sales rose to GBP91.9 million from GBP64.3 million a year earlier, while EU retail sales increased to GBP64.7 million, compared with GBP47.2 million a year earlier.
"The stellar performance in the UK did not offset the decline we have seen internationally," said Beighton.
ASOS said the biggest hit to its international business was strong currency appreciation, especially in territories such Russia, Asia and Australia, where it took the biggest hit.
"Despite lower prices for UK customers in sterling terms, abroad the currency rate makes our products look significantly more expensive. As a result we have seen a switch from international sales into UK sales," said Beighton.
To offset the higher currency rates abroad, ASOS said it employed higher levels of discounts to its products overseas, to offset the blow to its customers.
"We extended our discount offering, which is normally around 3% of sales, but in this [third] quarter, it was more like 5% of sales. However even this did not offset a 25% appreciation from currency," said Beighton.
It also said that clearance activity to re-stable stock levels was a big earnings drag in the quarter.
"We expect competition from online and multi-channel retailers to continue to put pressure on ASOS. This could lead to further margin pressure - our sense is that the price elasticity of demand is high for the ASOS customer demographic," said Liberum Capital analysts in a note following ASOS's profit warning.
Total retail sales for the group for the first nine months of the year rose 31% at actual exchange rates and 34% at constant currency to GBP715.3 million, up from GBP545.9 million the prior year.
"Whilst our profit performance for this financial year is not what we had hoped for due to an unusual combination of factors, our accelerated investment in technology and infrastructure to support our GBP2.5 billion sales ambition is progressing and capex remains within guided levels," said ASOS Chief Executive Robertson.
ASOS is pumping a large amount of money into its infrastructure, especially into IT and warehousing in the UK and Germany, as well as establishing a start-up in China, setting up distribution in the EU and expanding in the US. Robertson told journalists at a press conference for its half-year results in April that the investments are costly but necessary for future growth. ASOS currently has four distribution centres in the UK, as well across the EU and now in Shanghai.
"Growth isn't free," Robertson reiterated in a call Thursday, "it requires investment in capacity, infrastructure and technology, and that is what we are doing."
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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