Tuesday, September 27, 2022
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Asos warns on slowdown as inflation squeezes spending power

Online fashion retailer Asos has warned that sales slowed in August and that its full-year profits will be at the bottom of its previous forecast, as squeezed UK consumers put the brake on spending.

The UK group, whose shares have fallen more than 70 per cent this year, said that profits for the 12 months that ended on August 31 would be “around the bottom end of company guidance” of between £20mn and £60mn.

Many analysts had already shifted their own forecasts to the lower end of this range as evidence of a UK economic slowdown mounted.

Asos was among the first UK retailers to link surging inflation to a pullback in consumer spending. In its last update to the market in June, the group blamed inflation for an increased rate of product returns and slashed its annual profit forecast. UK inflation has since picked up to a double-digit rate, the highest level in more than 40 years.

In meetings with City analysts last week, Asos executives disclosed that a slowdown in spending in August had delayed the seasonal pick-up in spending for the autumn and winter.

The retailer did not make a statement to the market as the sales and profits numbers discussed were within the range of market expectations for the year to August 31 and its own guidance. Asos is scheduled to report results for its most recent financial year on October 12.

On Friday Asos disclosed that sales growth for the financial year just ended would be about 2 per cent at constant exchange rates, well below the 4-7 per cent range it forecast in June. As a result, net debt will be £150mn, above the £75mn-£125mn range previously forecast.

“The new guidance implies that the fourth period [of the financial year] was flat year-on-year,” said Guido Lucarelli at Citi, who added that he was now “cautious” on sales growth forecasts for the current year.

Tony Shiret at Panmure Gordon suggested in a note to clients this week that the market consensus of 10 to 11 per cent sales growth for its current financial year, which ends in August 2023, looked “too punchy”.

Asos said it had not given any guidance for the current financial year and that its own consensus of analysts’ forecasts showed an average projection of growth of 9.8 per cent.

Shares in Asos were up slightly in morning trade on Friday.

The intensifying pressure on UK consumers is the latest challenge for ecommerce retailers such as Asos and its rival Boohoo, which boomed at the height of the pandemic as locked-down shoppers flocked online but have struggled since as people return to stores.

Customers have begun to return clothes in greater numbers, diluting profit margins. Boohoo has responded by imposing a charge for returns while German rival Zalando has increased the minimum order value required to secure free delivery and returns.

There has been speculation that Asos will take similar measures, though in the past it has ruled out charging for returns.

Value fashion chain Primark has already warned that the rapid appreciation of the dollar, in which most wholesale garment purchasing is denominated, against both the euro and sterling, will squeeze its profit margins next year.



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