Global domination, it turns out, is harder to achieve than Asos's fan club had thought. The march towards annual sales of £2.5bn, from about £1bn currently, had been pencilled in as a four-year exercise to be conducted with steady profit margins of 6.5%-7%. That was the assumption that underpinned the bizarre and breezy willingness of some investors to pay almost 100 times earnings to get a slice of the action.
If you pay those prices, you're asking for trouble. It has duly arrived, in the form of Asos's warning that its profit margin this financial year won't be anything like 6.5%. It will be just 4.5%. Bang goes about a third of this year's expected pre-tax profits. Forget £65m, the outcome will be more like £45m.
What out-of-left-field mischief is at work? Despite Asos chief executive Nick Robertson's attempt to blame "an unusual combination of factors," the explanation is mundane if you're in the game of selling goods to 200 countries: old-fashioned currency movements, specifically the strength of sterling.
The Barnsley-based firm, operating off a sterling cost base and a sterling pricing structure, has been forced to discount heavily to compete in countries with weaker currencies – Russia, for example. What's more, when surplus stock is cleared in the UK, where sales are subject to VAT, the trade carries lower profit margins.
In the scheme of things, this is merely a serious setback for Asos rather than a catastrophe. The introduction of so-called zonal pricing may help in time. But the manner in which the firm was dragged into heavy discounting ought to alarm investors. Maybe a steady profit margin of 6.5% is simply outside management's control when you're attempting to expand internationally at a rate of 30% a year.
But Thursday's one-third collapse in the share price to £31.20 is definitely a catastrophe for those investors who were chasing the stock at £70 early this year. What were they thinking? At that point, Asos was worth £6bn, or about 90 times expected profits before Thursday's heavy revision.
Even now, at £31.20, the stock is hardly cheap – the valuation represents about 75 times expected earnings of 40p a share. Would you really pay that for a business that has now had two profit warnings – a mild one in March and now a thumper – in the space of three months?
Asos remains a great pioneering business – a UK internet champion in clothing. But the risks and potential rewards for investors still look wildly out of sync.
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