Berenberg slashes Asos price target after profit warning

Asos shares tanked on Monday after it downgraded its guidance for the year as weaker trading in November and heavy discounting took their toll.

The company said increased discounting, coupled with the unseasonably warm weather during the last three months reduced its average selling price, which has not been compensated by higher units per basket. As a result, average basked value is now lower year on year. This has driven higher variable costs through both its distribution and warehouse cost lines.

Berenberg, which retained its ‘buy’ rating, said that while the halving of EBIT margin guidance has understandably left investors concerned about the balance sheet, it believes ASOS will return to being free cash flow positive next year and having net cash in FY 2021E.

Still, the bank cut its estimate by 55%/35%/19% over FY 2019-21 to reflect the reduce guidance, leading the target price downgrade.

Berenberg argued that the exceptional level of discounting being seen currently is temporary, caused by excess stock across the sector following an exceptionally warm September/October and compounded by macro uncertainty.

"Given the impact on profit, the run rate is clearly unsustainable. However, while we believe discounting over the past quarter was exceptional, we do expect levels of discounting to remain above the long-run average over the next few years (as has been a feature of the last few years in the retail sector).

"We do not expect ASOS to participate in extreme discounting (and its differentiated business and convenient customer proposition should shield it somewhat), but by not participating there is a potential near-term revenue impact. As we have a lack of visibility over how long this could last, we cut our mid-term revenue forecasts as a result."

At 1110 GMT, the shares were down 3.7% to 2,196p.