Fresh evidence emerged today that the fast fashion industry’s efforts to improve its margins are falling flat, as Boohoo warned its plans to boost profitability are causing sales to tumble.
The online retailer, like most of the fast-fashion industry, has been making efforts to improve margins. It has raised prices, cut costs and clamped down on returns, as have rivals ASOS, H&M and Zara.
Boohoo’s margins are set to improve, but it came at the expense of a much larger than planned fall in revenue. Boohoo blamed “the continued targeting of more profitable sales”, as it said sales are now set to fall by 12% to 17%.
That means, even with slightly better margins, underlying profits are now set to be lower than previously thought, at between £58 million and £70 million.
Chris Beauchamp, chief market analyst at IG Group, said: “Never was a company more appropriately named – the dire set of figures this morning are likely to offer little relief for embattled investor.”
Fast-fashion retailers have struggled this year, as weaker consumer sentiment and unseasonal weather have made their high-volume business models trickier to execute.
Last week, ASOS blamed wet summer weather and the impact of its pivot to higher margins as profits came in at the bottom of its guided range.
The weather eventually improved, but at the wrong time for the fashion industry, as temperatures in London exceeded 30 degrees as retailers attempted to sell their Autumn/Winter lines. H&M warned its September sales would fall by 10% because of the September heatwave. The lone exception to the fast-fashion slump has been Spanish giant Zara, which reported a jump in profits in the first half.
Both Boohoo and ASOS have attempted to reassure investors that falling sales are part of the plan as they pursue new strategies, complete with turnaround-themed names, away from a high-volume, low-margin model. For ASOS that strategy was named “Driving Change”; for Boohoo, “Back to Growth”.
But the market hasn’t been convinced. Boohoo shares fell by as much as 9.8% to 28.5p today, their lowest price since 2015. That values the firm, once worth £5.2 billion, at £364 million. ASOS lost as much as 4.2%, and is down 15% in the last month, or 95% since its 2018 peak. ASOS is the most shorted share in the City, followed by Boohoo. Mike Ashley’s Frasers Group has been one of the few investors still betting on a recovery, repeatedly upping its stake in both.
Josh Warner, market analyst at City Index, said: “Investors may be fearful that the challenging economic outlook could cause more trouble for the pair going forward, with signs of a pullback in consumer spending already having hit the pair’s guidance.”
Boohoo CEO John Lyttle said: “Our confidence in the medium-term prospects for the group remains unchanged as we execute on our key priorities where we see a clear path to improved profitability.”
