Asos Cuts Full-Year Margin Forecast as Pound Strengthens

Asos Plc plunged in London trading, wiping 1.2 billion pounds ($2 billion) off its market value, after the U.K.’s largest online-only fashion retailer cut its profitability forecast and reported weakening sales growth, sparking concern of a broader slowdown.

The shares fell 31 percent to 3,120 pence, the steepest drop since a 2001 initial public offering. That reduced Asos’s market capitalization to 2.6 billion pounds. Shockwaves spread to other online clothing retailers, with Plc falling the most since April. Investment AB Kinnevik, the owner of a stake in Germany’s Zalando SE, also slid.

It’s the second setback in less than three months for London-based Asos, which said in March that increased investment would weigh on earnings this year. The unscheduled announcement added to concern that valuations for some online businesses may have run too far. After more than doubling in each of the last two years, Asos shares have slumped 49 percent in 2014.

“Just because you are online, doesn’t mean you will be successful,” said Maureen Hinton, global research director at Conlumino in London. “You still have to have the same attributes as a strong fashion brand offline.”, whose online offering mainly targets 16-to-24 year olds, sought to reassure investors as its shares fell further below the 50 pence at which they were sold in a March IPO. Business is “in line with expectations” the company said. The stock closed down 9.1 percent at 45 pence in London.

Kinnevik Slides

In Stockholm, Kinnevik declined 6 percent to 253.4 kronor. The Swedish company this year reduced the multiple of sales at which it values its 36 percent stake in Zalando to 1.9 times from 2 times to reflect lower profitability at the German company, Europe’s largest online shoe and fashion retailer.

“If you’re somebody like Zalando or you still need to have a very strong brand presence with the customer to be successful,” Conlumino’s Hinton said.

Across the globe, investors have been pulling out of technology stocks for much of the year in favor of companies with stable dividends and earnings. The Nasdaq Internet Index is down 13 percent from a March peak.

Asos’s earnings warning “is material” and will reduce the company’s full-year earnings guidance by about 30 percent, Richard Edwards, an analyst at Citigroup Inc., said in a note.

Earnings before interest and taxes in the year through August will amount to about 4.5 percent of sales, compared with a previous forecast of 6.5 percent, Asos said.

Increased Discounting

The company cited the strength of sterling against the euro, which made its international offering less competitive. Asos gets about 62 percent of sales from outside the U.K.

Increased discounting also weighed on profitability, the online retailer said, as it sought to entice more shoppers.

Retail sales growth was 25 percent in fiscal third quarter through May, Asos said, compared with 26 percent in the two months through February. International revenue rose 17 percent and U.K. retail sales advanced 43 percent.

The announcement reflects a “significant reset in the financial outlook for Asos,” analysts at Numis Securities Ltd. said in a note. Still, the brokerage said it continues to believe “that the quality of the customer proposition supports a significant global growth opportunity.”

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