A share which loses nine-tenths of its value has simply dropped 80 per cent, then halved. The lesson: in a bear market, more bad news always lies ahead. Witness UK-listed Asos. Investors had already pummelled shares in the online fashion retailer as the boom in pandemic ecommerce ended and inflation bit into consumer wallets. Yet a downbeat update on Thursday knocked the stock down another 29 per cent.
What set the Asos downgrade apart was its product returns. These jumped in the three months through May. That says something about consumer discretionary demand: it stinks. The next phase will come when the pace of sales, before returns, slips into negative territory.
Asos should not feel singled out. Online UK fashion rivals such as Boohoo and THG have also received market spankings. So has traditional big-box retailer Halfords. It moaned about slipping demand for higher-priced discretionary items such as bikes. Both Asos and Halfords prefer to compare this year to 2019 to measure the true state of their respective businesses.
That is not good enough for portfolio managers gingerly tiptoeing through the minefield. The City had already halved pre-tax earnings estimates for Asos for the year to August to roughly £70mn. New chief executive José Antonio Ramos Calamonte halved those forecasts again. Estimates for Halfords had not slipped so much this year. They will now.
What is striking about the plight of Asos is how much its valuation has contracted in recent years. This business was once a UK stock market darling. At almost 12 times forward earnings, it now wallows at a decade low. More estimate adjustments can only lift that ratio. Yet Asos gets lumped in with much dearer online retailers such as Germany’s Zalando, which trades at 31 times earnings, and UK food delivery leader Ocado, which has no net earnings.
All this could get worse. Tracking working capital will be vital for these businesses. At interims in February, Asos noted a need to build up stock given the nightmare of supply chain snags. Rising inventories now look like a problem rather than a solution.
Expect more discounting from retailers — online or otherwise — as they unwind hoarded stock. Earlier this month, Target of the US admitted it had overbought, blaming shifting consumer behaviour. Its shares plummeted. The maths for the sector is daunting.