THAT doesn’t compute. Digital retailing has been the blue-eyed boy of the wider sector for quite some time now, registering major double-digit leaps in growth, even if sometimes only from a relatively low base.
And online fashion retailer Asos was one of the biggest stock-market darlings of all, the internet brand with the mostest.
So the market was rocked yesterday when Asos hit it with a left-field profit warning, saying earnings this year would be about 30 per cent less than expected.
It was as if someone had sworn in the high street digital cathedral.
The prime reason, said the company, was that the strength of sterling had sandbagged overseas sales and forced it to enter the retail sector’s promotion-led spree with a vengeance.
Shares in Asos nosedived 40 per cent initially, slashing almost £1.5 billion from the group’s value, eventually ending the day down 31 per cent.
It is premature to say the wheels have come off a highly successful business. But it is beginning to look a little accident-prone.
This is the second profit warning from Asos in three months, the former one blaming the cost of new warehousing in the UK and Germany, and start-up expenses in China.
The other worry of the market is that if the pound’s strength continues then Asos will have to go even farther down the price promotion route and that, as it chases sales and volumes at the expense of price, profit margins will be hit.
The latest problem has seen the company’s promotions rise from 3 per cent of sales to 8 per cent. In some ways, its prospects have now become a play on the pound.
International sales account for 60 per cent of the group total, and overseas growth – while still enviably robust to many rival retailers – has slowed for four consecutive quarters.
One wonders whether there might be an element of another retail success story here, SuperDry, whose stunning growth created a rod for its own back in raising the bar to sustain that progress against strong comparators.
What Asos needs now is a weakening of the pound to take the pressure off its overseas sales, and a period of quiet with no sudden surprises such as the infrastructure spending that is also going to hit this year’s profits.
The good news is that the business model remains sound, and its core market of internet-savvy 20-somethings is not going to change the way they shop.
Digital clothes-buying is not a passing phase, it is a systemic retail change. And, if the group can get these two profit warnings out of its system there is no reason why it can’t resume its place as one of the pacemakers of the sub-sector.
Banks begin to arouse new investor interest
SPECIALIST lender One Savings Bank, owner of the former Kent Reliance building society, made its debut on the stock market yesterday, raising £134 million for the bank and its private equity backer, JC Flowers, in the process.
It debuted ahead of TSB coming to market later this month. Another specialist bank, Shawbrook, is set to seek a listing next year. Meanwhile, Royal Bank of Scotland plans to spin off its Citizens banking arm in the US in the final quarter. The Co-op Bank also managed to get its recent market capital-raising away without a problem.
In short, there seems to be a returning investor appetite for banking stocks.