When Investors Turn on ASOS, Everyone Should Worry

(Bloomberg Opinion) -- Britain may be in the midst of a heatwave, but a chill wind is still sweeping across the retail sector.

Online superstar Asos Plc, home goods chains DFS Furniture Plc and Dunelm Group Plc all reported disappointing trading on Thursday. The picture was also somewhat mixed at B&M European Value Retail SA. Profit downgrades from DFS and Dunelm are understandable – no-one wants to go to a retail park to buy a sofa in soaring temperatures.

But the picture at Asos is more worrying. Sales growth in Europe slowed to 31 percent, missing estimates for 39 percent expansion. Even though the company said overall sales would expand by between 25-30 percent this year – the kind of growth that many other retailers would kill for – the percentage was likely to be towards the lower end of this range. The shares fell 10 percent, the most since November.

Asos blamed its more-subdued outlook on its efforts to tame demand so customers don’t suffer while it introduces new warehouses in Atlanta and Berlin.

But there has clearly been some miscommunication: preparation for long-term growth should not have unnerved the market in the way that it has. Investors are certainly looking past the company’s better news: U.K. demand was stronger than expected, and margins are set to be boosted by less discounting. Infrastructure spending should help to deliver sales growth of 25-30 percent a year over the next few years, as well as a margin of 4 percent on an earnings before interest and tax basis.

Investors were happier with B&M. The company reported 1.6 percent U.K. like-for-like sales growth in the first quarter -- 3.6 percent excluding the difference in the timing of Easter this year. Within this, there was strong demand for summer products, from patio sets to paddling pools. This will leave less stock to discount at the end of the season, which it says should boost margins.

However, growth in the core B&M chain was below what some analysts were expecting. 

Asos and B&M remain retail success stories. But they are both highly rated, and must keep delivering superior performances to maintain their premium valuations.

The online retailer needs to demonstrate to investors that the slower sales growth really is about preparing the business for the future, and not an underlying problem. They will surely remember the situation four years ago, when ASOS didn’t have the right pricing strategy in place to cope with fluctuating exchange rates, and international sales suffered. 

B&M, meanwhile, faces tough comparisons in the current quarter. It must maintain sales growth, and meet its target of opening 50 new B&M stores this year to boot, all while the short sellers are circling. 

The problem both face is that, until recently, the outlook for U.K. consumers was turning more positive. Wage growth had finally moved ahead of inflation, and the job market stayed healthy. But political turmoil, a falling pound and higher oil prices may provoke a shift to caution – and tighter purse strings.

That's a worry for all chains. Those struggling have the most pressing challenges. But it isn't a walk in the park for the winners either.

©2018 Bloomberg L.P.

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