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Sep 16, 2014
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Asos to cut prices after third profit warning

Sep 16, 2014

LONDON, United Kingdom - British online fashion retailer Asos warned on profit for the third time in seven months, saying its needs to cut prices in international markets to reverse a sharp slowdown in sales growth.

Until this year Asos had been the great success story of British retailing and a darling of the stock market, helped by its appeal to internet-savvy twenty-somethings and high-profile fans including singer Rita Ora and U.S. First Lady Michelle Obama.

The strength of sterling, however, has hit sales growth at the international division, which comprises the United States and local-language websites in France, Germany, Spain, Italy, Australia, Russia and China, accounting for nearly 60 percent of total revenue.

Asos shares, already down 62 percent over the past six months, fell up to 15 percent on Tuesday after it said that pre-tax profit for its 2014-15 financial year would be similar to the 45 million pounds ($72.8 million) it expects from 2013-14.

Before the update analysts had been forecasting 62 million pounds for 2014-15.

The company said that the 17 million pound shortfall reflects the amount it plans to invest in the international business, primarily through price cuts but also in service improvements such as free returns.

That investment is in addition to previously announced plans to extend and automate its main warehouse in Barnsley, northern England, establish a "Euro hub" warehouse in Germany, develop its technology platform and invest in its China start-up.

"Historically, we've enjoyed much better rates of growth than we’re currently seeing and a large part of the reason for that is that our pricing as a result of the strength of sterling is increasingly out of kilter," Nick Robertson, Asos founder, Chief Executive and 9.3 percent shareholder, told reporters.

"The plan this year is to face into that and to take some of the funds and to invest back into that pricing."


Asos's latest warning could also weigh on the valuation of Zalando, Europe's biggest online fashion retailer, which plans to list its shares on the Frankfurt stock market this year. Shares in major Zalando investor Kinnevik fell up to 3 percent.

But for all Asos's recent troubles, including a fire at its Barnsley warehouse, Robertson said that its long-term outlook remains bright, reiterating its target of lifting annual sales to 2.5 billion pounds - more than double this year's figure.

“Fundamentally the story hasn’t changed, we're still building for the future," he said, though he would not say when he expects to hit the 2.5 billion pound sales target.

Having floated at only 20 pence in 2001, Asos shares hit a high of 71.95 pounds in February. They were down 224 pence at 22.04 pounds by 1044 GMT, valuing the business at about 1.8 billion pounds.

Cantor Fitzgerald analyst Freddie George, who has a "hold" rating on Asos, cut his price target to 20 pounds from 25 pounds.

"There will inevitably be questions over the robustness of the company’s model, particularly its development strategy overseas," he said.

ASOS, which issued profit warnings in March and June, said retail sales increased 15 percent to 240 million pounds in the three months to Aug. 31, taking the 2013-14 full-year total to 955.3 million pounds, a rise of 27 percent.

Fourth-quarter sales growth slowed from a third quarter rise of 25 percent.

UK retail sales increased 33 percent, having been up 43 percent in the third quarter, while international sales rose 6 percent, having been up 17 percent previously. The fourth-quarter gross margin fell by 640 basis points.

Asos said the fire at its Barnsley warehouse hit quarterly sales by 25-30 million pounds with a retail gross margin impact of about 200 basis points. It is insured for the losses.

Robertson said reports last month of possible U.S. bid interest in Asos were "sheer speculation".

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