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FTSE falls as Asos crash sends shivers through retail sector

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FTSE falls as Asos crash sends shivers through retail sector

The FTSE 100 has fallen into the red, with retail stocks dragging down the index after a profit warning from Asos (ASOS) sent shares in the online clothing retailer crashing.

The UK blue-chip index fell 25 points, or 0.4%, to 6,820, with Marks and Spencer (MKS) among the heaviest fallers, down 4.4% at 252.2p.

Shares in Alternative Investment Market stock Asos tumbled 41% to £24.78 as the retailer warned that it had 'experienced a significant deterioration in the important trading month of November and conditions remain challenging'.

The group has cut its full-year expectations as a result. 'The current backdrop of economic uncertainty across most of our major markets together with a weakening in consumer confidence has led to the weakest growth in online clothing sales in recent years,' it said.

Phil Webster, who holds the stock in his BMO UK High Income (BHI) trust, said he still believed in the structural growth of the online retailer.

‘It has not become a bad business overnight,’ he said. ‘There are a lot of distressed retailers out there. Also with having warmer weather this year, jumpers, cardigans etc. are just not shifting.’

He conceded that Asos could have made a more concerted Black Friday discounting push. ‘But this doesn’t change the long-term business model, it’s not catastrophic and the business still presents structural growth,' he said.

Webster had reduced his position in the shares from 2.2% of his portfolio at the end of September to 1.5% before today's news. But he won't be seizing on the slump to buy more shares just yet.

‘It is just not possible to try and guess what markets are going to do,' he said. 'While we see great value in names like… Asos, we need to wait for the dust to settle, especially when suffering downgrades.’

Asos is the top holding for Andrew Neville and Matthew Hall in their £46 million Allianz UK Mid Cap fund, representing 6.1% of the portfolio. Citywire AA-rated Gerard Callahan, meanwhile, holds 4.1% of his £349 million Baillie Gifford UK Equity Alpha fund in the stock.

Peel Hunt analyst John Stevenson placed his 'buy' recommendation under review and slashed his full-year profits forecasts by 53% on the news.

'In a market unsettled by heavy discounting and with many retailers running extensive five- to 12-day Black Friday campaigns, we believe Asos effectively lost voice in the market and missed peak with offers that failed to engage and excite customers.'

Numis analyst Simon Bowler cut his target price from £70 to £50 on the news, maintaining his 'buy' rating.

'Key performance indicators and management commentary point to market rather than model challenges, and we retain our longer-term enthusiasm for the Asos investment case, while acknowledging visibility has reduced,' he said.

Russ Mould, investment director at AJ Bell, said the stock's lofty rating of 40 times earnings had contributed to the scale of today's share price fall.

'This is generally what happens when a company that is priced for growth fails to deliver,' he said.

Rival AIM online clothing retailer Boohoo (BOOH) fell 11.1% on the news, despite saying trading was in line with expectations.

Mid cap retail stocks were also heavy fallers. 

Those in the red included:

  • Dunelm (DNLM) -5.7% at 510p;
  • B&M European Value Retail (BMEB) -4.5% at 286.4p;
  • JD Sports (JD) -4.5% at 339.9p;
  • Dixons Carphone (DC) -3.1% at 132.6p;
  • Card Factory (CARDC) -2.7% at 167.7p
  • Sports Direct (SPD) -2.3% at 230.6p

Among small cap stocks, plus-size clothing retailer N Brown (BWNG) dropped 7% to 103.9p and Debenhams (DEB) was down 6.9% at 5p.

Mould said that the Asos warning had sparked fears the UK retail sector was 'both cyclically and structurally challenged'.

'In other words, it is not just that we've stopped shopping on the high street, it is that we're spending less overall,' he said.

'The read-through from Asos' results is that consumers are feeling sufficiently nervous to put off purchases no matter how they make them,' he said. 

A report from market research company Springboard estimated footfall on the UK high street was 9% lower on Saturday than the same time last year amid the bad weather.

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