$1 Billion Loss Is the Nightmare Before Christmas

(Bloomberg Opinion) -- Asos Plc’s Monday-morning disaster is only the start of British retail’s Christmas nightmare.

The online clothing seller issued a severe profit warning on Monday. The shares initially fell 35 percent, amounting to an 800 million-pound ($1 billion) loss. A range of other chains were also dragged down.

$1 Billion Loss Is the Nightmare Before Christmas

To some extent, it’s a surprise that the first seasonal shocker has come from Asos. It specializes in fast fashion, which should give it a firmer handle on trends than lumbering rivals. The conventional wisdom goes that internet retailers should be in a better position that beleaguered bricks and mortar stores when a squeeze on shopping comes.

But the clothing sector has been hit by the double whammy of warm weather and rocky consumer confidence stemming from the U.K.’s substantial political turmoil. While Brexit looks like it might become the next convenient excuse for poor trading, senior retailers say the downturn since October has been real. It’s as if someone switched the lights off. And the malaise is not confined to Britain — Asos says young shoppers in France and Germany have also been reluctant to splash out on coats and pricey sneakers.

The company has also been growing quickly for the past three years. So when the music stopped, it was bound to feel an outsized effect. 

$1 Billion Loss Is the Nightmare Before Christmas

As I have argued, the poor economics of online retail are often overlooked. Constant investment is needed to offer the most cutting-edge technology and fend off cutthroat competition. One rival is Boohoo Group Plc, which also offers cheap, trendy clothes and said on Monday that its trading had been strong. Though Asos has been spending heavily, it will now lower its capital expenditure target for this year from as much as 250 million pounds to 200 million pounds. 

$1 Billion Loss Is the Nightmare Before Christmas

For all its difficulties, Asos should still have an advantage from being easily available online and on mobile, and having a young and enthusiastic customer base that’s engaged with the brand through social media. The likes of Marks & Spencer Group Plc and Debenhams Plc, which cater to older customers and have struggled to get their digital offering right, will be feeling some pain. 

Another typically strong performer, Associated British Foods’s Primark, said two weeks ago that November had been “challenging.” If it and Asos are finding life tough, then other, weaker, chains will be having an even more miserable holiday. 

The seeds of Monday’s bad news were planted last week by Mike Ashley, the founder of Sports Direct International Plc, who said that November had been “unbelievably bad” for store chains. He’s fond of saying that he’s not Father Christmas. But his comments bequeathed a gift to any struggling retailers. They now have a green light to report disappointing festive trading. Asos is continuing what Ashley started, and this warning is unlikely to be the last. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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