Asos shares drop on concern discounting may erode profitability

[LONDON] Asos Plc shares fell as much as 6.4 per cent after the UK online fashion retailer said discounting and a weak pound are weighing on profitability.

The retail gross margin contracted by 40 basis points, to 47 per cent, in the first half, the company said Tuesday.

Price cuts overseas were the main reason for the decline, chief executive officer Nick Beighton said. Asos will try to maintain prices in the UK even as disposable incomes in that market will probably be squeezed, he said.

"Real incomes for our UK customers are likely to come under threat," Mr Beighton said on a call.

"We will do everything within our grasp to hold prices for UK customers."

The retailer, which sells own-label fashions alongside wares from brands such as Adidas and Ted Baker, has used the pound's weakness to lower prices for international customers. Asos generates about 62 per cent of its sales from abroad. Concern on how that may hurt profitability overshadowed the company raising its full-year sales forecast, weighing on a stock that had gained 81 per cent in the year through Monday.

The company said international sales grew by 54 per cent to £548.4 million (S$958.89 million) in the first half. Asos raised its full-year sales-growth forecast range by 5 percentage points to between 30 per cent and 35 per cent.

Asos said it expects to report full-year pretax profit broadly in line with consensus estimates for £80.6 million. Analysts expected £81.2 million, according to data compiled by Bloomberg.

BLOOMBERG