The great rotation in consumption habits is in full swing. And things don’t look good for Asos Plc.
The online retailer recently announced a surprise profit warning, along with the departure of Chief Executive Officer Nick Beighton. The stocks fell as much as 17%.
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Asos’ slowdown in sales growth is further evidence of the decline in lockdown trading – which means we’re going back to the mall instead of always buying from our smartphone screens. But it also reflects how the prospect of higher cost of living and rising interest rates are beginning to dampen consumer spending.
Asos warned sales would rise 10-15% in year through August 2022, compared to the 18% reported in the Bloomberg consensus of analysts’ estimates. The group forecasts underlying pre-tax earnings of Â£ 110 million to Â£ 140 million ($ 191 million), which is below analysts’ expectations of about Â£ 190 million.
Several factors are driving the bleak outlook. First, online sales growth has stalled due to the reopening of stores, with numbers looking particularly weak in September. Asos expects sales to increase in the mid-single-digit percentage range in the first half of the current financial year. That’s less than half the rate of expansion in the final quarter of fiscal 2021.
Second, higher expenses, such as increased freight costs due to supply chain issues and customers returning purchases, also hurt the business. In the case of women’s fashion, returns can be up to 50%. They were depressed during the pandemic, but are ticking again. Nobody cares if sweatpants are a little casual; not so much a figure-hugging dress.
For Asos, that means Â£ 67.3 million will be lost this year. Add in the competition from China’s SHEIN Group Ltd, whose technology and supply chains make the current pace of fast fashion glacial, and it’s not hard to see why Asos is seeing lower profits and why outgoing chairman Adam Crozier is making a change at the top felt necessary.
Meanwhile, the return to schools and offices also seems to have a negative impact on digital commerce. More expenses go into transportation and lunch, not to mention entertainment. (After the price of âNo Time to Dieâ at the cinema and a few drinks, there is less left for the tweed suit or the Mac eyeshadow palette.) Asos’ 20-year-old customers have far more opportunities to inject their money than they used to in 2020 when online stores were the main shopping option.
But other concerns may have the greatest impact on the company’s earnings outlook. Headlines warning of inflation and rising food and fuel costs seem to scare consumers. Higher borrowing costs as central banks consider raising interest rates is another concern.
In September, the BRC-KPMG Retail Sales Monitor recorded the slowest year-over-year growth in total sales since January when the UK was locked. Separately, PwC found that consumer confidence in the strength of their disposable income was lowest this year.
Companies have factored in price increases to pass the added cost of supply chain confusion on to customers. But fragile consumer sentiment is jeopardizing this ability and putting additional pressure on profit margins.
So far, wage growth has kept pace with inflation. Asos also hopes its Millennial and Gen-Z customers will return to events and vacation again. But when inflation beats incomes – like last time prices rose significantly a decade ago – the company’s young fan base will have less money to buy what they need, let alone the new fashions they need she wants.
Online shopping was booming during the pandemic. We are about to see how far it is being scaled back. That worries Asos and the rest of the consumer sector.
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