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ASOS shares jump as guidance reassures after profit plunge

FILE PHOTO: A model walks on an in-house catwalk at the ASOS headquarters in London April 1, 2014. REUTERS/Suzanne Plunkett/File Photo

By Sonya Dowsett

(Reuters) - British online fashion retailer ASOS reported an 87 percent drop in first-half pretax profit on Wednesday, hurt by poor trading in the run-up to Christmas and logistical hiccups as it entered the U.S. market.

Yet the company, whose affordable on-trend garments have made it a hit with young buyers and made it one of Britain's most successful online retailers, stuck to its guidance for sales, profit margins and capital expenditure for the full year.

Shares in the company were boosted by the reassurance and traded up 13 percent at 35.66 pounds by 1000 GMT, though still well below their 41.86 pounds level before a shock profit warning in mid December.

ASOS, whose current offers feature one-shoulder mini dresses for 25 pounds ($33) and jumpsuits for 40.50 pounds, was one of the first purely online clothing retailers in the UK.

It is now facing cut-throat competition from new players like Boohoo and Missguided, targeting teens who shop with their phones and share fashion shots on social media.

Changing consumer habits have led to heavy discounting in the fashion sector as shoppers use the Internet to compare prices. Meanwhile, uncertainty over Britain's exit from the European Union has dampened consumer demand in ASOS's domestic market, which accounts for around one third of sales.

"It's certainly been a challenging six months for us and one of the most challenging we've seen in many years," Chief Executive Officer Nick Beighton told analysts at a presentation.

"Economic uncertainty has undermined consumer confidence and during the period we saw exceptional levels of discounting."

In addition to wider sector problems, ASOS's new U.S. warehouse struggled to cope with demand, adding to challenges in France and Germany where sales were weak. The U.S. accounts for around 12 percent of sales.

"ASOS is capable of a lot more," said Beighton.


The company, which sells brands ranging from Abercromie and Fitch to Superdry as well as its own collections like its ASOS Design label, is investing heavily in technology platforms and infrastructure such as warehouses and distribution centres.

It has nearly doubled staff levels at its U.S. warehouse in Atlanta, ASOS said on Wednesday, and all U.S. orders were being fulfilled locally rather than through Britain, allowing the retailer to restore its service delivery promise.

While pretax profit for the six months through February fell to 4 million pounds, ASOS maintained full-year guidance for 15 percent sales growth and a 2 percent profit margin at the level of earnings before interest and tax (EBIT).

John Stevenson, analyst at Peel Hunt who rates the stock "buy", said he expected an accelerating sales performance over the second half and into 2020, with the U.S. warehouse on stream and actions to improve the European offer well progressed.

"Given the scale of the global opportunity for ASOS, the current share price weakness remains a clear buying opportunity for longer-term investors,” Stevenson added.

But some analysts took a negative view.

"We see medium-term margin recovery as unlikely for ASOS, as industry fragmentation, more promotional activity and new consumer habits are driving underlying margin pressure," said Bank of America Merrill Lynch in a research note, rating the stock "underperform".

(Reporting by Sonya Dowsett in Madrid; Editing by Paul Day and David Holmes)