Retail Melts Down Before Christmas in the UK, Spreads to Continent

After “the worst-on-record unbelievably bad” November, even e-commerce gets hit, not just brick & mortar, on fears Christmas sales could be terrible. 

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

With just one week left before Christmas, Europe’s fashion retail sector is showing little sign of yuletide cheer. On Monday, the shares of UK-based online fashion and cosmetics retailer Asos Plc plunged 37% to £26.14 after the company warned that Christmas shopping on its web platform had got off to a disastrous start. The stock rout, the company’s worst in almost five years, wiped more than £1.4 billion of its value and raises fears that Europe’s high street malaise may be spreading from bricks-and-mortar stores to e-commerce. Since its peak in January 2018, shares the stock has plummeted 65%.

Asos slashed its full-year sales-growth guidance for the year to August 2019 from 20-25% to 15% on the back of a “significant deterioration” in sales in November, which was followed by just a slight uptick in December. The company laid much of the blame for its weak performance on big price cuts across the market, which had forced it to sweeten its promotions to attract customers.

“In fashion we are seeing an unprecedented level of discounting, certainly something I have not seen before, and that’s across the board,” said Asos chief executive, Nick Beighton, adding that the disposable incomes of Asos’s twenty-something customers were still well below the levels they were at a decade ago. “It’s more than just the Brexit-related factors,” he said.

Another possible reason for Asos’ shrinking sales is the over-indebtedness of consumers in its domestic UK market. British household finances, among the most solvent a generation ago, are now among the most indebted of the Western world. According to official data, unsecured consumer debt (not including housing related debt) last year reached a record high of more than £205 billion (€227 billion). PwC says that by its measure, it’s almost £100 billion higher.

This summer the Office for National Statistics (ONS) warned that the accumulated deficit of UK households was equivalent to 1.2% of GDP. That compares with a surplus in France equivalent to 2.7% of GDP and a surplus equivalent to 5.1% in Germany. But that’s scant comfort for Asos, whose sales in France and Germany, which account for over half of its EU sales, are also languishing. On Black Friday, the company knocked 20% off everything, as it did in previous years, but to little avail. Its rivals went lower.

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News of Asos’ sales warning sparked a frantic sell-off on Monday of other online retailers such as Boohoo Group Plc, whose shares plunged 13.7%, and Zalando SE (11.6%), as well as store operators like Marks & Spencer Group Plc (4.5%), Next Plc (4.6%) and Hennes & Mauritz AB, the owner of H&M stores (8.5%), compounding concerns that Christmas sales could be exceptionally bad this year. On Tuesday the shares staged a recovery but not to pre-Monday levels. Asos’ stock clawed back less than 5% of the value lost.

Mike Ashley, the founder of discount retailer Sports Direct, last week described November as “the worst on record, unbelievably bad”. Sports Direct recently reported a 27% fall in half-year profits after taking over the insolvent department store chain House of Fraser for £90 million in August. Since then the department store has clocked up additional losses of £31.5 million and Sports Direct’s shares have slumped over 45% since hitting a 52-week high of £4.36 in July.

Holders of retail debt are also feeling the pain. UK department store chain Debenhams’ £200 million of bonds due July 2021 have plummeted 36 pence on the pound since the start of 2018 — on surging fears of a default.

Even Europe’s two biggest high street behemoths, Spain’s Inditex and Sweden’s Hennes & Mauritz, are finding life a little harder this Christmas. Last week, Inditex, whose subsidiaries include Sara, Massimo Dutti, Bershka and Pull&Bear, missed sales and profit forecasts, which it blamed on an unusually warm September and adverse currency moves.

The fast-fashion group, founded 33 years ago by Europe’s richest man, Amancio Ortega, operates some 7,500 stores in 93 countries. It generates over half its sales in currencies other than the euro. But thanks to its centralized sourcing and distribution model, a sizable chunk of its costs are in euros, meaning that when important emerging market currencies fall, as has happened this year, the company’s margins can suffer. At constant exchange rates, the group claims it would have reported nine-month earnings growth of 14%. Instead it had to make do with a meager 3% rise, to €3.07 billion.

It was less than expected. Indeed, the company is on track for its weakest full-year earnings growth in at least four years, according to Bloomberg. Since reporting its latest sales figures, Inditex’s market cap — the largest in Spain and one of the largest in Europe — has shrunk by 15%, to €73 billion. Barring a dramatic turnaround in the next two weeks, the world’s largest fashion retailer will notch up its second consecutive year of declining share prices, which are now down 36% since hitting a historic peak of €36 in June 2017.

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Inditex’s biggest rival, H&M, is in similar straits, having seen its shares tumble by over 16% since the beginning of December. Unlike Inditex, it has been slashing its store prices. Yet despite reporting local-currency sales growth of 6% during the September-to-November period, the company is still heading for a third straight year of declining profits as a result of slowing footfall at its core brand stores, which are struggling against online competition.

But if Asos’ recent tribulations are any indication, even the online competition may now be struggling. “This goes against the script,” said Stephen Lienert, a credit analyst at Jefferies. “It was supposed to be bricks and mortar that’s dying and online is the future, but that headline gets ripped up today,” he said.

While other online retailers such as Boohoo and Zalando predictably deny having similar troubles to Asos, if sales in December don’t dramatically improve on Europe’s high streets and e-commerce platforms, the New Year could bring with it a flurry of profit warnings, or even worse. By Don Quijones.


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