Asos, Boohoo Shares Plummet as Freight Costs, Returns Weigh on Sales
LONDON — Just 18 months ago, Asos and Boohoo were riding high, dispatching fast fashion to homebound customers, and buying up the remains of their less fortunate rivals Arcadia Group and Debenhams.
On Thursday, the share prices of both British companies were down in the double digits as they warned the markets about inflation, rising returns and the higher cost of shipping and supply chain operations.
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The companies’ woes come against a toxic backdrop of soaring inflation, rising interest rates, a cost-of-living crisis and consumers’ return to brick-and-mortar shops.
On Thursday, just hours after both companies updated the markets, the Bank of England raised interest rates for the fifth time in a row to 1.25 percent.
Asos, which sells third-party fashion brands as well as in-house labels, warned in an unscheduled trading update that adjusted profit before tax would be lower than expected due to higher customer returns.
The warning sent its share price tumbling more than 27 percent in late-morning trading to 8.41 pounds. The shares closed down 30 percent to 8.08 pounds.
The company said that gross sales accelerated in the three months ended May 31.
However, net sales were impacted by “a significant increase in returns rates in the U.K. and Europe towards the end of the period,” reflecting inflationary pressures on consumers, Asos said.
It added that returns were having a “disproportionate impact” on profitability.
As a result, Asos has updated its guidance for the full fiscal year to reflect “uncertain consumer purchasing behavior” and “the potential continuation of higher returns.”
Revenue growth is set to be 4 to 7 percent, while adjusted profit before tax will range from 20 million pounds to 60 million pounds. That compares to analysts’ earlier projections of 63 million pounds to 104 million pounds.
Total group revenue in the first quarter was flat at 983.4 million pounds.
Mat Dunn, chief operating officer, said Asos was already taking steps to mitigate the impact of global supply chain challenges.
The company has reduced inventory and increased newness and availability, and has reaped the benefits in the form of strong gross sales and a further acceleration of growth in the U.S.
Earlier this year, “we noted that the impact of inflationary pressures was yet to be felt by our customers. What is now clear, based on the significant increase in returns rates that we have seen, is that this inflationary pressure is increasingly impacting our customers’ shopping behavior,” Dunn said.
“It is too early to tell for how long the current pattern of customer behavior will continue, but we are taking swift and decisive steps to minimize the impacts, while continuing to deliver against the strategic initiatives we laid out in November that will ensure that Asos builds for the long-term,” he added.
Jefferies called the Asos update “disappointing,” noting that the midpoint profit guidance was around 50 percent below consensus.
“While there is some comfort in the improved top-line exit rate, the absorption of a higher returns environment into estimates is going to weigh,” said the report penned by Andrew Wade and Grace Gilberg.
The profit warning and the share price decline eclipsed what was supposed to be the big news of the day for Asos: the appointment of a new chief executive officer and chair.
José Antonio Ramos Calamonte has been named CEO, while Jørgen Lindemann is the new chair.
Ramos Calamonte is currently chief commercial officer of Asos, and takes up his new role with immediate effect. He has worked for brands including Inditex, Esprit and Carrefour Spain, having started his career at McKinsey.
He joined Asos from the Portuguese fashion company Salsa Jeans, where he held the position of CEO for more than two years.
Lindemann, who joined the Asos board as a non-executive director last November, will succeed Ian Dyson in August. Lindemann is the former president and CEO of Modern Times Group, the Sweden-based digital entertainments business.
He recently stepped down from the board of Zalando following five years as a non-executive director.
Asos’ fast-fashion rival Boohoo said its revenues declined 8 percent in the first quarter to 445.7 million pounds due to tough comparisons with the corresponding period last year when lockdowns were still in effect.
Net sales in the three-month period ended May 31 were impacted by the ongoing “normalization of returns.”
Shares in the company fell more than 14 percent to 56 pence in late-morning trading. The shares closed down 12 percent at 56 pence.
Boohoo said U.K. sales improved month-on-month in the first quarter and that it returned to net sales growth in May. It added that international performance continued to be impacted by increased delivery times.
The group said its outlook for the fiscal year ending on Feb. 28, 2023, remains unchanged.
Revenue growth is expected be low-single digits, with a return to growth in the second quarter and growth rates improving in the second half of the year as the group annualizes “high returns rates and normalizing consumer demand.”
Adjusted EBITDA margins are expected to be 4 to 7percent, in line with prior guidance. The group said it continues to be affected by pandemic-related and inflationary factors that negatively impact supply chain costs and Boohoo’s “competitive proposition.”
Specifically, the company flagged higher freight costs, and said it continues to increase sourcing from near-shore markets in order to reduce exposure to those costs.
“We have seen promising signs from the group’s sales performance in the U.K., which has improved month-on-month in the period, and we are looking ahead towards our key summer trading season as holidays ramp up and customers look to the latest fashion from across our brands,” said Boohoo’s CEO John Lyttle.
“Looking forward, we will continue to focus on optimizing both our financial and operational performance to ensure the business is well placed to take advantage of future growth opportunities,” he added.
Harry Barnick, senior analyst at Third Bridge, which supplies research to private equity, hedge funds and other financial businesses, wasn’t as sanguine as Lyttle.
He believes that, in the first quarter, Boohoo “struggled to excite the fast-fashion customer” post-COVID-19.
“Boohoo’s impressive growth has stalled, dampened by inflation and the rising cost of living as consumers begin to tighten their purse strings. The sales challenges are compounded by sky-high freight rates and raw material cost inflation. Boohoo is now faced with the challenge of increasing prices in a promotionally driven and highly competitive market,” Barnick said.
He added that Boohoo will have to find creative ways to reduce costs. “Improving purchasing costs through fabric consolidation and production locations are key to the success of this cost-reduction strategy.”
Jefferies took a broader view, noting the “substantial growth” that Boohoo has achieved versus pre-pandemic levels.
The bank said that looking back to the first quarter of fiscal 2020, the last pre-pandemic comparison, the company’s first-quarter revenue this year is 75 percent higher representing a three-year compound annual growth rate of 20 percent.
Some 18 months ago, midway through the pandemic, Asos and Boohoo were flashing the cash and picking over the remains of older, struggling retailers such as Arcadia Group and Debenhams.
In January 2021, Boohoo bought the down-and-out Debenhams department store chain for 55 million pounds — minus the store estate — and later added Dorothy Perkins, Wallis and Evans, three brands from the defunct Arcadia Group’s stable, to its portfolio.
At the beginning of lockdown in 2020, it also bought Warehouse and Oasis, two longtime high-street retailers that were forced to wind down.
Asos, meanwhile, snapped up Arcadia’s three jewels — Topshop, Topman and Miss Selfridge (minus the real estate) — for 330 million pounds, adding them to its multibrand platform.
Since those buying sprees, not everything has been rosy, however.
While both companies raked in revenues and profits during the pandemic, they also faced their share of challenges.
Boohoo’s reputation was severely tarnished by a sweatshop scandal in 2020, after which it began making changes to how it treats factories and suppliers.
Last October, Asos saw its shares plunge by as much as 14 percent after it warned that profit margins would be squeezed and sales forecasts bogged down by Brexit-related duty costs and broader supply chain issues linked to the aftermath of COVID-19.
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