The ASOS plc (LON:ASC) (ASC.L) share price has declined by over 40% today after the online fashion retailer released a profit warning.
Although trading in September and October was in line with expectations, November was significantly behind forecasts. According to the company, this was due to economic uncertainty across many of its major markets, with a weakening in consumer confidence causing a slowdown in online clothing sales.
The company has experienced a high level of discounting across its markets. It has therefore increased its own level of promotional activity in response, which has led to a higher discount and continued high clearance mix. This has reduced its average selling price, with average basket value down year-on-year. As a consequence, higher variable costs are being experienced through both its distribution and warehouse cost lines.
ASOS now expects to post sales growth of 15% for the full year, which is down from a previous range of 20-25%. Its retail gross margin is expected to fall by 150 basis points, while previously it was due to be flat versus the previous year.
In my opinion, further falls for the company’s share price could be ahead in the near term. Investors may take a little while to price in today’s profit warning, which comes at a time when the outlook for retailers remains highly uncertain. The Brexit process plus concerns surrounding the world economy’s outlook may cause further challenges across the industry in my opinion.
I feel that ASOS has growth potential in the long run as a result of the continued switch of shoppers from bricks-and-mortar retailers towards online operators. This process could even accelerate as technology improves. Therefore, in the long term, I believe the stock could offer recovery potential. But in the near term there may be more volatility ahead after today’s stock price decline.