Footasylum warns over FY earnings, margin after heavy discounting

Streetwear and sportswear retailer Footasylum warned on Tuesday that earnings would be towards the lower end of analysts’ forecasts, while gross margin will be lower than current market expectations following heavy discounting over Christmas.

In the 18 weeks to 29 December 2018, total revenue was up 14% to £102.3m, and up 16% year-to-date to £200.8m. Online sales rose 28% to £36m, and on a year-to-date basis now account for 33% of total revenue, up from 30% in the comparative period.

Wholesale revenue doubled in the period to £2.6m, while revenue from stores increased 5% to £63.7m despite challenging UK high street trading conditions and the previously announced delays in delivering planned upsizes and new stores.

The company said it had seen "some of the most difficult trading conditions in recent years" amid economic uncertainty and weakening consumer sentiment, as the challenging trading conditions reported in the first half continued throughout the Christmas period.

This meant that promotional activity and discounting across the retail sector were higher than expected, with Footasylum's levels of promotional and clearance activity also greater than expected during the period.

Revenue growth was sustained across all channels but gross margin has been lower than previously expected. As a result, Footasylum continues to expect to report FY19 revenue in line with consensus expectations but gross margin for the year is expected to be lower than current consensus forecasts.

Footasylum said it was implementing a cost-reduction plan across the business that could result in some exceptional costs in FY19, but should help stem the margin decline. Consequently, it now expects adjusted earnings before interest, tax, depreciation and amortisation for the year to be towards the lower end of the current market range.

Chairman Barry Brown said: "In the context of the current tough conditions on the high street, we are encouraged to have delivered revenue growth across all of our channels and major product categories, with online and wholesale continuing to perform particularly well. We have also been pleased by the performance of the five new store openings and three upsizes that we completed in time for Christmas.

"However, the short-term outlook is undeniably challenging, and we continue to maintain our focus on cash, working capital and inventory management, as well as reducing costs across our operations. The current trading conditions have led to significant discounting and promotional activity across the sector, and this in turn has impacted our gross margin expectations for FY19."

Liberum, which rates the stock at ‘hold’ with a 30p price target, said: "While the cuts today are disappointing we would hope that we have passed the nadir of bad news."

The brokerage lowered its FY estimate for gross margin to 42.5% from 43%, while its EBITDA forecast was reduced from £4.8m to £3.1m for the year to Feb 2019 and Liberum now expects a pre-tax loss of £3.7m versus a loss of £1.9m.

At 0810 GMT, the shares were down 19.2% to 26.25p.