Asos' profit warning: What the analysts say

We don’t think that the foreign exchange picture has worsened materially since Asos last reported, i.e. the translation factor is not the issue. We think the issue here is one of pricing; Asos still basically prices off the UK stock file meaning that its pricing is likely to look less attractive in markets such as Australia and Russia, where foreign exchange has moved against Asos. We suspect this has led to a need for greater discounting to keep the price proposition attractive - Sanjay Vidyarthi, Liberium

Today’s Asos profit warning is material, reducing full-year 2014 earnings guidance by c.-30%, and will likely reduce consensus medium-term EBIT margin assumptions to 5-6% (from 7-8%), in our view, with significantly implications for the group’s valuation. We think both themes will likely weigh on the shares today. A higher proportion of UK sales in the mix has negatively affected gross margin by -100bps. Additionally foreign exchange weakness has meant that increased promotional and clearance activity drove third quarter gross margin down a further -190bp. - Richard Edwards, Citi analyst

The ASOS international price proposition has become less competitive because of sterling’s appreciation. To a certain extent, this drop-off in international demand was picked up by UK customers - noting the group’s still single, global stock pool. Trying to respond to weaker international demand, management stepped up the level of discount activity, and this did not provide a permanent recovery in international sales levels and was also more heavily bought into by UK customers. Asos is no longer the only ecommerce stock on the market. With a variety of companies in several consumer submarkets, we believe valuation metrics will focus more on EBIT margins and profit delivery. With competitors such as Boohoo and Just Eat expected to deliver materially higher margins, the days of 4-6x sales multiples for ASOS look to be long gone - John Stevenson, Peel Hunt

ASOS has been impacted by a number of different factors, but this warning in relation to overseas trading and margin mix/promotions is considerably worse than the factors that preceded it, which included higher China losses and the effect of disruption and double running from the next leg of warehousing/infrastructure development. Today’s news will come as a shock to many and is also worse than we had feared. With its investment plans on track, including zonal pricing and merchandising there will be some scope to mitigate current headwinds from H2, but we would expect next year’s forecasts to also be downgraded considerably, possibly of the order 20-25%. - Matthew McEachran, N+ 1 Singer