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Asos downgrades forecast after slow November

Online-only fashion player Asos has reduced its growth expectations for fiscal 2019 after experiencing a “significant deterioration” in trading in the month of November and flagging challenging conditions going forward.

The UK-based company on Monday released a trading update for the first three months of FY19, revealing that trading in September and October was broadly in line with expectations, but was significantly behind expectations in November, an important month from both a sales and cash margin perspective.

Despite a difficult end to the quarter, Asos managed to deliver a 14 per cent increase in total sales on a reported basis (13 per cent on a constant currency basis), and a 16 per cent increase in total orders placed, compared to the same period last year.

But the current backdrop of economic uncertainty across several major markets, together with weakening consumer confidence, which Asos said has led to the weakest growth in online clothing sales in recent years, caused the retailer to lower its expectations for the year.

Asos now expects sales in FY19 to increase around 15 per cent on FY18, compared to the 20-25 per cent increase it was previously forecasting. Retail gross margin is now expected to drop by around 150 basis points, whereas it was previously expected to remain flat at 49.9 per cent. EBIT margin expectations have been halved to around 2 per cent, and capital expenditure has been revised down to around £200 million ($351 million).

“We achieved 14 per cent sales growth in a difficult market, but in the light of a significant downturn in November, we think it’s prudent to recalibrate our expectations for the full year,” Asos CEO Nick Beighton said.

“We are taking all appropriate actions and our ambitions for Asos have not changed”.

The company expects the second half of FY19 to be more profitable than the first half, even more significantly than is typical for a retail organisation, as one of the biggest factors that has dragged on profitability so far this year – transition costs that have been budgeted to hit a peak of around £30 million ($53 million) – is expected to decrease in the months ahead.

Other factors impacting Asos’s profitability so far this year include the high level of discounting and promotional activity across the market, and the unseasonably warm weather of the past three months.

The retailer continues to outperform the market in the UK, while trading has been in line with expectations in the US, and mixed in the EU. Sales in the company’s ‘rest of world’ segment, which includes Australia, has been significantly behind expectations .

Asos intends to next update the market on trading on February 15, 2019.

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