Asos Shares Plunge on Profit Warning

Fashion retailer's second profit warning in nine months reveals forecasts have been slashed amid delays to warehouse upgrades and increased costs

James Gard 18 July, 2019 | 10:34AM

Asos website

Shares in fashion group Asos (ASC) plunged after a profit warning blamed on warehouse problems in the US and Europe.

The company brought forward next week’s trading update to tell investors that distribution changes have taken longer than expected and reduced the availability of stock for sale, impacting on sales.

Profits for the full year are now expected to be between £30 and £35 million - significantly less than the pre-tax profit of more than £100 million  recorded last year, and lower than the full-year forecast of £56 million. The cost of improving the company’s warehouses and logistics has been raised from £35 million to £47 million.

Shares in Asos, which last issued a profit warning in December 2018, plunged 25% in early trading but had recovered slightly by mid-morning, when they were down 13% to £23.70, a fall of 373p. The company has been one of the greatest success stories on junior investment market Aim since it floated in 2001: the shares rocketed from 24p at launch to a high of more than £70 in 2018, but have since tracked down to £24.

At the time of the December profit warning, Morningstar columnist Rodney Hobson said: "Clearly the travails of the high street have spread to the internet, perhaps inevitably so ... I just do not see any relief for retailers any time soon."

Despite the warning on profits, Asos reported an 11% rise in sales in the last four months of the year, driven by strong growth in the UK.  

While the troubles of the UK retail sector are well known, the latest figures for June show a surprising bounce in sales. June's retail sales grew 0.9% month on month, against a decline of 0.4% in May. The year-on-year rise was 3.6% in June, compared with a 2% rise in retail sales in May.

Market Faith is Shaken

After the firm’s half-year results in April, Morningstar analyst Jelena Sokolova retained a fair value estimate of £34.80. She believes the firm's shares are undervalued, and that it is well positioned to increase its market share in new regions in Europe and the US. While the company does not yet have an “economic moat” or sustainable competitive advantage, its brand is strong and Asos benefits from offering clothing lines that are only available on its site.

Ian Forrest, investment research analyst at The Share Centre, says the market’s faith in the company has been shaken by this latest profit warning. “The shares have fallen 60% over the past year and are likely to remain volatile until a line has been drawn under the warehouse problems, so investors should remain very cautious.”

FTSE 100 fashion firm Burberry also updated the market this week. In contrast to Asos, shares climbed around 20% as the company confirmed that ranges by new designer Riccardo Tisci had been well received by customers.

Asos makes up 2.5% of four-star rated Baillie Gifford UK Equity Alpha, according to Morningstar Direct data. Silver-rated Baillie Gifford Global Discovery allocates nearly 1% of the fund to Asos.  

Morningstar analyst David Holder says of the Global Discovery fund: “The strategy offers investors a strongly differentiated approach for long-term capital growth from a portfolio of global smaller companies. Investors should be aware that with a focus on nascent companies in volatile sectors, the strategy is likely to offer a very bumpy ride.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
ASOS PLC2,250.00 GBX4.70
Baillie Gifford Global Discovery B Acc1,602.06 GBP-0.62
Baillie Gifford UK Equity Alpha A Acc571.64 GBP-0.84

About Author

James Gard  is content editor for Morningstar.co.uk

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