Shares in online fashion retailer ASOS plunged 40% this morning as the market digested a less than rosy revision to growth guidance for the firm’s financial year.

The AIM-listed firm announced sales growth of 14% for the first three months of the financial year but said they had “experienced a significant deterioration in the important trading month of November” with conditions remaining challenging. As a result, the clothing company reduced expectations for the year to August 2019, including a predicted drop from the previously stated 20-25% sales growth to 15%.

The company did say trading in September and October was broadly in line with expectations but a weaker November, which includes both Black Friday and Cyber Monday, has clearly spooked the market. Investors will not be buoyed by the firm’s apparent inability to capitalise upon retail-specific promotional days but it looks like it is the heavy discounting that is to blame, in part, for the downward guidance.

Chief executive Nick Beighton referenced a high level of promotional activity across the market, forcing ASOS to increase its own promo efforts and higher discounts, subsequently bringing down average selling prices.

Beighton joins Sports Direct’s Mike Ashley in lamenting November’s trading conditions, which seem to be affecting the whole sector - a theme investors have picked up on this morning. Shares in online retailer Boohoo have been dragged down on the news despite record Black Friday sales across the group, with Marks & Spencer and Next dropping as well.

Black Monday?

The UK retail sector still hasn’t really found a comfortable relationship with Black Friday or Cyber Monday. With retailers now offering deals in the weeks coming up to the days themselves, instead of the traditional Boxing Day sales, discounts are being brought forward and spread over a longer timeframe. This means retailers are not only borrowing sales from January but having to extend the overall offer period to at least match the competition.

Arguably this is a much bigger factor in today’s update than the 2018 buzzwords ‘unseasonably warm weather’ and ‘weakening consumer confidence’ we’ve got used to hearing, but ironically this might comfort ASOS investors somewhat.

Bottom-up stock pickers will notice the advantages online retailers hold over their bricks and mortar competition whatever the weather. Customer data, capital light business models and targeted advertising capabilities have all helped the online fast fashion brands mostly avoid the high street malaise this year. Today’s share price drop might show investors that ASOS isn’t untouchable but with wages rising faster than inflation and a return to normal prices round the corner, the market will have to decide whether its reaction this morning was a bit too fearful or right on the money. When pounds start hitting tills again will ASOS fans switch to high street shopping or return to business as usual?

It’s easy to fall into shock and awe on such a pronounced share price fall but long-term investors need to look at the sector through a wider lens. 2019 and onward will reveal those companies able and willing to incorporate technology into their operations for the good of the bottom line. Those interested in the retail space will have to decide whether ASOS can weather the short-term storm, or if the disruptor is ripe for disruption.

More on ASOS

Five year performance

Past performance is not a reliable indicator of future returns

Source: Thomson Reuters Datastream, as at 14.12.18, in local currency with income reinvested