Shares of ASOS and Boohoo were suspended because fast fashion retailers were disappointed

– ‘Uncertain’ purchase patterns and higher returns to ASOS

– Boohoo reports first drop in sales in the UK

– Chinese competitor Shein is swallowing market share

Stocks in fast fashion competitors ASOS Record (ASC) i Boohoo (BOO: AIM) fell after the former gave another profit warning and the latter reported a weak start to its financial year 2023 with news of its first drop in UK sales.

Both online clothing retailers are feeling the pressure due to rising costs at a time when customers in the absence of money are reducing spending on clothes that are not necessary, and more and more young fashionistas are returning products.

ANOTHER WARNING FROM ASOS

In an unplanned update, ASOS reported a year-on-year increase in group sales of just 4% in the third quarter to May 31, 2022, well below the growth needed to meet year-round guidelines amid rising yields on expensive products as consumers struggle with inflationary pressures.

Shares of ASOS fell 27.5% to a 12-year low of 840.5 p, and pre-tax profits are now expected to range between £ 20m and £ 60m, well below the consensus of £ 92m pounds.

The seller cited a massive downgrade due to ‘uncertain’ consumer buying behavior and the potential continuation of higher returns, with year-on-year sales growth of between 4% and 7%.

Lower profitability and higher inventory levels also affect the creation of cash for ASOS. Instead of the net cash position of 93 million pounds predicted by analysts, ASOS now expects to end its year with a net debt of between 75 million and 125 million pounds.

ASOS has at least finally ended its search for a new CEO after appointing José Antonio Ramos Calamonte to the hot seat and nominating non-CEO Jørgen Lindemann as president.

BOOHOO BITE COMPETITION

Shares in Booho fell 18% to a five-year low of 53.2 p after the Manchester-based retailer announced news of subdued trading in the first quarter until May 31st.

Group sales fell 8% from a year earlier, a result below consensus caused by the first drop in sales in the UK, where broker Liberum believes Boohoo is losing stake after two years of significant growth.

After warning last month of slowing revenue growth and higher operating costs, Boohoo also disappointed investors with news of a huge 28% drop in quarterly sales in the U.S., where aggressive Chinese ultrafast fashion retailer Shein is swallowing market share.

Boohoo’s gross margin fell 220 basis points to 52.8% as the digital retailer continued to invest in boosting market share gained during the pandemic.

As for the outlook, there were no changes in the guidelines for the year to February 2023, with Boohoo still forecasting low single-digit sales growth with an adjusted EBITDA margin of 4% to 7%, although well below Boohoo’s historical margin of 10%.

EXPERT VIEW

Commenting on the latest ASOS profit warning, AJ Bell’s investment director Russ Mold said: ‘What a day for José Antonio Ramos Calamonte to be appointed CEO. There will be no pomp and celebration, but he will announce terrible news on the first day at work. Considering that this is an internal promotion, he will not be surprised by the situation in which he has been operating for ASOS since January 2021.

‘It’s all a change at the top for ASOS with a new chair, and Jørgen Lindemann has been appointed. Investors will hope for a new thinking in the boardroom, especially as the stock price has fallen by 80% in the last 12 months and is now at its lowest level in 12 years. ‘

Mold explained that Boohoo has hopes for people buying new clothes for their summer vacation, although this may not be the big payout it expects.

‘The pressure on human finances means that many people will not be able to afford to leave this summer and therefore could be happy with their current wardrobe if the most exotic thing they will do is sip piña colade from their deckchair into the garden.

‘Boohoo’s latest sales figures show how hard life is for fashion retailers. Revenues fell 8% in three months, and overseas operations continue to struggle with delivery delays.

‘Unfortunately, life could get even worse for ASOS and Boohoo, as countless companies facing consumers are experiencing reduced demand.’

DISCLAIMER: The financial services company AJ Bell mentioned in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.


Date of publishing: 16 June 2022

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