The great rotation in consumer habits is well under way. And it’s not a good look for Asos Plc.
The online retailer announced a surprise profit warning recently, along with the departure of chief executive officer Nick Beighton. Shares fell as much as 17%.
The slowdown in Asos’s sales growth is further evidence of the unwinding lockdown trade — meaning we’re heading back to the mall rather than always buying from our smartphone screens. But it also reflects how the prospects of higher living costs and a hike in interest rates are starting to dampen consumers’ desire to spend.
Asos warned that sales in the year to August 2022 would expand by 10-15%, compared with the 18% indicated by the Bloomberg consensus of analysts’ estimates. The group forecasts underlying pre-tax profit of 110 million to 140 million pounds ($191 million), which is below analysts’ expectations of about 190 million pounds.
The gloomy outlook is being driven by a number of factors. First, online sales growth has been stalling as stores have reopened, with September numbers looking particularly weak. Asos expects revenue to increase by a mid-single digit percentage in the first half of its current financial year. That’s less than half the rate of expansion in the final quarter of fiscal 2021.
Second, higher expenses, such as raised freight costs from supply chain issues, and customers sending back purchases are also hurting the company. Returns can be as high as 50% for womenswear. These were depressed during the pandemic but are ticking up again. Nobody minds if sweatpants are a little slouchy; not so much a figure-hugging dress.
For Asos, that means losing a 67.3 million-pound benefit this year. Add in competition from China’s SHEIN Group Ltd, whose technology and supply chains make the current pace of fast fashion look glacial, and it’s not hard to see why Asos is flagging lower profits, and why outgoing chairman Adam Crozier felt a change at the top was needed.
Meanwhile, the return to schools and offices seems to be weighing on digital retail too. More spending is going toward transport and lunches, not to mention entertainment. (After the price of seeing “No Time to Die” at the cinema and a few drinks out, there’s less leftover for that tweed suit or Mac eyeshadow palette.) Asos’s 20-something customers have far more ways to splash their cash than they did in 2020, when online stores were the main way they could shop.
But other concerns may be having the biggest impact on the company’s profit outlook. Headlines warning of inflation and rising food and fuel costs appear to be scaring consumers. Higher borrowing costs as central banks consider raising rates are another worry.
In September, the BRC-KPMG Retail Sales Monitor saw the slowest growth in total sales compared with the year earlier period since January, when the UK was in lockdown. Separately, PwC found that consumers’ confidence about the strength of their disposable incomes was at its lowest this year.
Companies have been factoring in price hikes to pass on the extra costs from supply chain snarl-ups to customers. But crumbling consumer sentiment jeopardises that ability and puts more pressure on profit margins.
So far, wage growth is keeping pace with inflation. Asos also hopes it will get a boost from its millennial and Gen Z customers going to events and taking holidays again. But if inflation outstrips incomes — as it did the last time prices rose significantly a decade ago — the company’s young fanbase will have less money to buy what they need, let alone the new fashions they want.
Online shopping boomed during the pandemic. We’re about to see just how far it will scale back. That’s a worry for Asos and the rest of the consumer sector.