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Asos' stark profit warning adds to UK retail woes

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Asos' stark profit warning adds to UK retail woes

British online clothing retailer Asos PLC on Dec. 17 issued a stark profit warning that sent its shares plunging more than 40%, a worrying sign that the pre-Christmas woes bedeviling traditional brick-and-mortar retailers have spread to the online sector.

"Whilst trading in September and October was broadly in line with our expectations, November, a very material month for us from both a sales and cash margin perspective, was significantly behind expectations," London-based Asos said in a statement. "The current backdrop of economic uncertainty across many of our major markets together with a weakening in consumer confidence has led to the weakest growth in online clothing sales in recent years. We have recalibrated our expectations for the current year accordingly."

In late morning trading in London, Asos shares were down 1,744 pence, or 42%, to 2,442 pence.

For the current financial year to August 2019, Asos revised its sales growth target to about 15% from a previous estimate of 20% to 25%, cut its EBIT margin guidance to 2% from 4% and said it would reduce capital expenditure to about £200 million. "There has been a high level of discounting and promotional activity across the market," Asos said. "We have increased our own level of promotional activity, leading to higher discount and continued high clearance mix." The company added: "This increased discounting, coupled with the unseasonably warm weather during the last three months has reduced our average selling price which has not been compensated by higher units per basket."

The pain is widespread. On Dec. 7, Associated British Foods PLC said November trading at its Primark clothing unit had been "challenging." On Dec. 12, British fashion chain Superdry Plc's shares plunged by more than a third after it issued a profit warning that it blamed warm weather for affecting sales of winter jackets and sweaters. On Dec. 13, Sports Direct International PLC's CEO Mike Ashley said November sales were "the worst on record" and warned that Christmas shopping had been so poor for retailers that it "will literally smash them to pieces," according to several U.K. news reports. On Dec. 17, Laura Ashley Holdings plc said it would close 40 U.K. stores while expanding its presence in China.

Bigger retailers are not immune. On Dec. 17, H & M Hennes & Mauritz AB (publ)'s shares fell more than 6% on worries about the strength of fashion company's road to recovery, even though local-currency sales for the three months to Nov. 30 rose 6% from a year earlier. One company that decided not to engage in discounting during the autumn season was Zara owner Industria de Diseño Textil SA, which reported a 4% year over year increase in net profit in the first nine months of fiscal 2018.

For many U.K. retailers, though, a heavy and prolonged period of discounting around Black Friday did not deliver the November boost many had expected. "Instore retail suffered the most in November — the instore retail spend fell by 10.1 points on October as footfall remained subdued despite Christmas looming," said Emily Salter, retail analyst at GlobalData, in a note. According to retail research group Springboard, although online U.K. retail spending rose on Black Friday in 2018, footfall in British stores fell more than 5% compared to Black Friday 2017.

A multitude of factors are responsible for the malaise on Britain's high streets. Physical retail stores have been hurt by the shift to online shopping, while high consumer debt levels and low consumer confidence have not been helped by the uncertainty surrounding Brexit. A report published Nov. 9 by PricewaterhouseCoopers found that an average of 14 stores were shuttered every day in the first half of 2018. During that period, there were 2,692 closures and 1,569 openings in Britain's top 500 high streets, leading to a net loss of 1,123 stores. By comparison, the net loss in the first half of 2017 was 222 stores.

"Looking ahead, the turmoil facing the sector is unlikely to abate," said Lisa Hooker, consumer markets leader at PwC, in the report. "The British high street is in urgent need of new ways of thinking and new forms of retail."

Hooker's views were echoed by Natalie Berg, analyst at NBK Retail, who said: "2018 will be remembered as the year that retail bosses finally pulled their heads out of the sand and acknowledged that we have an oversupply of retail space. We should be bracing ourselves for more short-term pain as retail configures itself for the digital age."