Why The ASOS plc Bears Were Right

So, online fashion retailer ASOS (LSE: ASC) (NASDAQOTH: ASOMF.US) is in trouble, then?

On 16 September, the waning star issued its third profit warning in seven months, sending its shares crashing 215p (8.9%) on the day to £22.07p — at one point the prices dipped as low as £20.03.

The current woes started back in March when ASOS warned that its venture into China was being hit by start-up losses and that annual profits would suffer as a result. That was compounded in June by the news that prices were being cut thanks to the strong pound in order to remain competitive in overseas markets.

Price crash

Together, the three warnings have helped knock 70% off the ASOS share price since February’s peak of £71.95. In fact, ASOS shares are now lower than their previous boom-and-bust peak of £25.08 back in June 2011.

And that’s sad. But I think it was inevitable.

This time the shock has come from flagging overseas sales, and ASOS is going to have to cut prices further and invest heavily in infrastructure and technology. Instead of the previously-expected pre-tax profit of £62m, the company is now anticipating about £45m, below last year.

The real problem

But the real problem behind ASOS’s boom and bust story lies deeper.

The thing is, ASOS really only ever had one thing going for it, and that was first-mover advantage. Others had tried to sell clothes online before, but the technology wasn’t up to it and their low-bandwidth offerings failed. But the market really was there, and for a few short years ASOS pretty much had it all to itself — and people saw those early meteoric sales rises and piled in.

But what moat did ASOS build around itself to keep the competition at bay? What barriers to entry are there stopping others selling their clothes online? What unique proposition does ASOS have to set it apart? I see none – it just looks like an online shop that sells clothes.

Over the past two or three years, the retail sector really has caught up with the 21st century, and just about everybody has got online stores running. NEXT, possibly the UK’s best clothing retailer, is seeing online sales soaring. And the rest of them are there in the UK — Marks & Spencer, Debenhams and all the traditional catalogue companies. And we’re seeing inroads being made by Boohoo.com.

And the same is true the world over, where the traditional retailers have a key advantage over ASOS — they have their existing infrastructure of warehouses, stores and distribution networks already in place.

Very competitive

ASOS bulls point to the great potential for online shopping growth, and they’re right — but it’s very competitive, and any assumption that ASOS is going to get the lion’s share seems horribly over-optimistic.

ASOS will almost certainly be able to get back to sales and earnings growth, but it’s unlikely to be at the breakneck pace that was needed to justify share prices of over £70!