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Boohoo shares and ASOS shares collapse to multi-year lows

The share prices of both ASOS and Boohoo are plunging as the cost-of-living crisis begins to bite into fast fashion.

ASOS (LON: ASC) and Boohoo (LON: BOO) shares were just two of many beneficiaries of the covid-19 pandemic. Government-mandated lockdowns across the world saw physical shops close and consumers forcibly shepherded to online offerings in a way that they never had before.

However, as the pandemic wanes and monetary policy tightens, today’s trading statements have seen both the ASOS share price and the Boohoo share price collapse.

ASOS shares are down to 820p, a far cry from the 5,772p they commanded only in April last year. And at 54p, Boohoo shares are trading at pennies above its 2014 Initial Public Offering price of 50p.

Boohoo share price: tough comparables

Boohoo saw revenue fall 8% to £445.7 million in the three months to 31 May, partially explained by tough pandemic comparables, but also by increased customer returns.

Sales fell in almost every region, with its worst performance in the US. UK sales fell by 1%, their first fall ever, before returning to growth in May. Worryingly, gross margin slipped by 220 basis points to 52.8%.

However, Boohoo had already warned that sales would fall this quarter, and it’s still forecasting a return to growth in Q2 and overall revenue growth in the ‘low-single digits’ for the entire financial year.’

CEO John Lyttle struck an optimistic tone despite the dour results, enthusing he was ‘pleased with the progress we are making towards our strategic priorities, which is already having a meaningful impact operationally.’

The CEO also highlighted ‘promising signs from the Group’s sales performance in the UK, which has improved month-on-month in the period and we are looking ahead towards our key summer trading season.’

While the PR nightmare arising from its supply chain scandal has receded, strong pandemic-era comparables, returns piling high, rising costs, supply chain disruption, and huge competitive pressure mean Boohoo could struggle to maintain market share.

Third Bridge analyst Harry Barnick argues that rival Shein ‘could take market share from Boohoo in the UK market given its broad offer and attractive price position.’ The analyst further emphasised that ‘Boohoo will have to find creative ways to reduce costs. Improving purchasing costs through fabric consolidation and production locations are key to the success of this cost reduction strategy.’

ASOS share price: falling profits

ASOS’s update did not make for better reading. While sales rose by 4% to £987.9 million in the quarter, it now expects adjusted pre-tax profits of between £20 million and £60 million, below its January prediction of between £110 million and £140 million, and far below the £193.6 million of the last financial year.

Moreover, gross margin fell by 310 basis points to 44%, driven primarily by elevated freight costs and sustained promotional activity to keep customers ordering. However, ASOS still expects revenue to grow between 4% and 7% in the financial year.

But like Boohoo, AOS said ‘net sales were impacted by a significant increase in returns rates in the UK and Europe towards the end of the period, reflecting inflationary pressures on consumers which has a disproportionate impact on profitability.’

COO Mat Dunn told investors that ‘based on the significant increase in returns rates that we have seen, is that this inflationary pressure is increasingly impacting our customers' shopping behaviour.’ Concerningly, he thinks it ‘too early’ to tell how long this effect will last, with a knock-on effect on warehousing, delivery costs, and labour inefficiency.

However, ASOS has finally found a replacement CEO in Chief commercial officer José Antonio Ramos Calamonte, after Nick Beighton resigned last October. The new CEO emphasised that ‘the sharp increase in return rates during the period happened at the same time that consumers started to feel the pinch,’ noting the correlation between the National Insurance increase and a ‘share increase’ in return rates in the UK.

After the collapse of Missguided and the fall of the Arcadia Empire, investors are becoming increasingly nervous over the prospects of fast fashion companies. Non-necessary clothing is a controllable area of discretionary spending, and the target audience of both Boohoo and ASOS are young people disproportionately likely to be hit harder by sky-high inflation and interest rates.

And with both set to rise further Boohoo shares and ASOS shares remain exposed to further falls.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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