Once a darling of the stock market, struggling fashion retailer Asos issued another profit warning alongside its third-quarter trading update this week.

While the fashion retailer set its sights on overseas domination, has it allowed its one-time immoveable crown to slip?

Asos reported a 28% increase in profit before tax to £102m for the year to August 31, 2018, but the City was already braced for trouble ahead.

Profit expectations for this financial year were initially expected to be much lower at £55m, and this week expectations were downgraded again to between £30m and £35m – marking the once indomitable retailer’s second profit warning in seven months.

The fashion market leader blamed “operational issues” in its US and European warehouses for the change in guidance.

What went wrong?

A collection of system errors in its warehouse in Berlin and third-party brand issues in its Atlanta warehouse continue to put a strain on the business.

Asos explains although the installation of new technology systems in its Euro Hub was completed “in line with plan”, it faced challenges as it “increased the volume of stock being processed through the systems”.

“Challenges with the interaction between our automation and warehouse software meant the expected efficiencies have been delayed and this has correspondingly impacted availability,” a spokesman for the fashion retailer said.

Across the pond, the blame is put on its third-party partners.

“These are huge programmes and sometimes in huge programmes things aren’t quite as smooth as you’d like them to be”

Asos

Some of its “smaller, less sophisticated” brand partners which had previously not been sold in America impacted the retailer’s availability, a spokesman explains.

“Third-party brands providing product to the US [warehouse] for the first time proved slower to resolve US specific compliance issues than we had anticipated, and we have not yet received the width of range from some of our more established brand partners.”

The “temporary lack of stock” issues in Europe and limited offerings in the US will continue to damage Asos’ profits for the rest of the financial year. Cue the profit warning.

Asos says: “We’re in the process of going from being a local provider to a global provider. These are huge programmes and sometimes in huge programmes, things aren’t quite as smooth as you’d like them to be.

“There are things that haven’t gone as well as they had liked, but they’re testing new ground really in some aspect.”

Lack of clarity

But one City analyst says blaming ongoing problems with its warehouses “sounds like one excuse after the other”.

Shore Capital analyst Greg Lawless says: “We had the profit warning in December last year where clearly there was a sales miss, but earnings were going to half and now we’ve gone down again seven months later.

“They were trying to spin [following this week’s profit warning] that it’s not demand-led, that the demand is still there and structurally they should be a winner, but they are clearly going through significant growing pains. With the benefit of hindsight, they shouldn’t have done two warehouses [in Germany and the US] at the same time.”

Hindsight doesn’t help investors though and as the stock market closed last night, Asos’ share price had dropped 23.2%.

“You might as well put your finger in the air and come up with a profit number for the 2020 and 2021 financial years because we’ve got no clarity”

Greg Lawless, Shore Capital

Lawless also believes that Asos did not provide sufficient guidance on its recovery plan following its profit warning yesterday.

“You might as well put your finger in the air and come up with a profit number for the 2020 and 2021 financial years because we’ve got no clarity. They believe margins will recover towards 4% but they won’t even tell you when or what the quantum might be for next year, so these shares are going nowhere,” he says.

But chief executive Nick Beighton insists issues across its US and German warehouses will be rectified before the end of its financial year.

“We are clear on the root causes of the operational challenges we have had, are making progress on resolving them, and now expect to complete these projects by the end of September,” he says.

However, the City isn’t so confident in this assertion.

Numis analyst Simon Bowler says: “It’s difficult at this stage to have full confidence that these issues will end in September. We just have to take management’s words for it at this time.”

Lawless has similar trepidations.

“They’ve said the American problem will go away by October and the European problem by the end of September, but if they’ve not, what does that mean for peak?” he asks.

Boohoo takes over

In another blow to the struggling business, rival etailer Boohoo’s market cap has overtaken Asos’ for the first time.

Boohoo is now worth £2.5bn, with Asos lagging behind its younger competitor at £1.8bn.

Although Boohoo is a much smaller business compared with Asos, it has the big advantage of being able to learn from the market leader’s mistakes. 

“Asos is feeling the pain before Boohoo does and Boohoo has the opportunity to learn from Asos’ mistakes and take a bit more time over it,” says one senior retail executive.

Lawless agrees. “Boohoo continues to grow at pace and has managed to grow its infrastructure without any hiccups like Asos,” he says.

UK hope

But at nearly 20 years old, Asos continues to show strength in the UK, its most mature market.

Asos’ UK business registered 16% sales growth to £334.1m in the UK during the four months to June 30, driven by initiatives including next-day delivery options with a midnight cut-off time.

So why does it struggle to replicate the sales growth and smooth UK distribution process overseas?

The fashion retailer has spent the past three years on internal transformation programmes around warehousing and technology, yet problems continue to arise in the US and its Euro Hub.

“I guess investors will give Beighton until Black Friday to turn things around, but if Asos mess that up again, then the knives really will be out”

Nick Bubb 

Bowler says: “Theoretically a lot of what those other problems may be – capacity, environment and positioning – if they’re apparent anywhere it should really be in the UK, and actually the UK business continues to grow very strongly.

“I know it’s not growing at the same percentage rate as the likes of Boohoo but it’s obviously coming at it from a bigger base – but if you look at the UK business there’s no real reason for anyone to get too concerned with that.

“Looking at the US and European businesses, because there are these elements of disruption going on it’s harder at this point in time to say definitively: Are there other challenges that the business is facing in those regions – is the competitive environment tougher? Is the brand resonating as well?

“It’s all slightly being lost in the noise at some of the disruption they’re experiencing. I think that side of things is wait-and-see.”

Under pressure

How long Asos’ board and shareholders are willing to “wait and see” is another question.

Beighton’s moves over the next few months will be under the spotlight, but one executive says this is the time for the board to support him and “work their way through the issues” together.

Lawless, however, is less forgiving, and believes that the lack of guidance for the upcoming financial year signals a “management credibility issue”.

“The management team are under a lot of pressure, but these are self-inflicted issues,” he says.

“You’ve got a new chairman and new chief financial officer, they talk about beefing the management team up but Asos was really vague about how long it would take to get these people in the business,” he says.

“It could take six months, so that’s not going to help.”

Independent retail analyst Nick Bubb says although there is “clearly a growing management credibility problem, the financial director hasn’t been there long enough to be a scapegoat” and therefore believes Beighton will be under significant pressure to rectify Asos’ performance in time for peak trading.

“I guess investors will give him until Black Friday to turn things around, but if Asos mess that up again, then the knives really will be out,” he says.

Beighton hasn’t got long to turn things around and all eyes are on him to make sure the retailer has plenty more good days on the horizon.