Yesterday’s 40% crash at online clothing retailer ASOS(LSE: ASC) has been seen as more than a single company setback, but a sign that online retailers are about to feel the same pain as their bricks & mortar rivals.
The news shattered all the Christmas cheer surrounding online retailers, with more than £3bn wiped off the sector as investors lost their festive spirit in the wake of yesterday’s shock profit warning.
The AIM-listed group slashed sales growth expectations after reporting a “significant deterioration in the important trading month of November.” Our familiar enemies economic uncertainty, challenging conditions, and weakening consumer confidence were all cited. Throw in a “high level of discounting and promotional activity” as retailers scrap for territory, and it’s beginning to look like game over for the ASOS share price.
To buy or not to buy?
Or is it? The bargain hunters have been out today and the ASOS share price has jumped 5% as a result, although I would warn against getting too excited. I’ve bought on bad news several times, and rarely came off well. Profit warnings, like Hamlet’s worries, come not as single spies, but in battalions.
ASOS still reported a 13% increase in total retail sales to £640m year-on-year, while total orders rose 16% year-on-year to 17.1m. However, gross profit margins dropped by 150 basis points and November could herald worse to come.
December won’t be magic
The group’s warning of “the weakest growth in online clothing sales in recent years” is yet another sign of Brexit angst and a broader slowdown, and was echoed by Sports Direct CEO Mike Ashley’s comment that “November’s trading was unbelievably bad,” which had everybody worrying about December.
Yet not every retailer is suffering. Boohoo Group(LSE: BOO) dashed off a reassuring update saying that its trading performance remains strong, “with record Black Friday sales across the group and continues to trade comfortably in line with market expectations.” This helped to calm anxious sellers after the stock plunged 15% in the wake of the ASOS news.
So maybe ASOS is the problem. It shares have now tanked from a peak of 7730p in mid-March to 2724p today, shedding almost two thirds of their value. Boohoo’s stock has fallen 9% in the last year but investors who bought three years ago would still be up by 372%.
If you’re tempted, remember that things can change quickly in this sector. ASOS said everything looked rosy as recently as October. We will know more about Boohoo when it reports its results for the four months to 31 December on 15 January.
Boohoo has second-mover advantage over ASOS, the ability to learn from its predecessor’s mistakes, as Alan Oscroft points out here. My biggest worry is that both stocks are still priced for strong growth, with ASOS trading at more than 26 times earnings, and Boohoo more than 47 times.
Another worry is that in the current climate, City consensus earnings per share growth forecasts can hardly be relied upon. I’d buy Boohoo over ASOS, but it does look pricey, given the risks.
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harveyj has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.