Monday 25 March 2019 11:11 am Interactive Investor Talk

ASOS and Bonmarche in share price collapse

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By Graeme Evans from interactive investor.

Investors in these two high-profile retailers ran for the hills following the latest trading updates.

While ASOS (LSE:ASC) and Bonmarche (LSE:BON) operate in two very different retail worlds, the pair have plenty in common from an investor viewpoint after their December profit warnings were followed by more disappointment last week.

ASOS shares were down as much as 13 per cent to leave this former high-flying AIM-listed stock 45 per cent below the 5,000p price seen in early December. Prior to the internet giant's pre-Christmas warning about poor trading in the key Black Friday month of November, some analysts had speculated that ASOS could be worth as much as 8,000p.

The mood will be just as glum for income investors holding Bonmarche shares after the over-50s focused retailer said its performance since the start of March had been significantly weaker. That's a big blow for the dividend, which has appeared under threat ever since the company reported in December that trading conditions were worse than the 2008/9 recession.

Mark Photiades, retail analyst at Cantor Fitzgerald, assumes that further dividend payments are now unlikely for the foreseeable future as the company focuses attention on rebuilding cash balances. The stock had recently been yielding 9.6 per cent after a surprise increase in the dividend pay-out of 8.5 per cent to 7.75p a share last summer.

Even though Photiades now expects full-year losses of £5.5 million for the year to the end of this month, he continues to see positives in the Bonmarche outlook and has retained his 'buy' recommendation, albeit with a price target reduced from 65p to 50p.

Source: TradingView (*) Past performance is not a guide to future performance

Photiades adds:

"The online performance remains encouraging and whilst the store portfolio is suffering we would remind investors that there is a high degree of flexibility in the store estate with the average lease length just 3.6 years."

Based on the company's positive comments about an encouraging early reaction to spring and summer ranges, he is keeping his forecast for break-even in the 2020 financial year.

But that's small comfort for investors after a turbulent few months in which Bonmarche was left with a surplus of autumn and winter stock following poor November trading.

Having discounted heavily to clear this excess stock, trading was then better than expected as warm weather in February brought forward demand for transitional seasonal ranges. This came at a cost, however, with trading in March reversing those earlier sales gains.

Cantor forecasts net debt of £2.5 million at the end of this financial year, which is when cash balances are at the lowest point of the cycle. However, Bonmarche stresses that its bank facility is sufficient to meet liquidity requirements, while it also expects to operate with a positive net cash balance in 2020. Shares still slumped 29 per cent to 26.1p today.

The market reaction was not quite as severe at ASOS after some positives in the quarterly trading update included continued outperformance in the UK, with sales growth of 14 per cent. But this was offset by further trading challenges in France and Germany, which are the online retailer's largest markets. ASOS is now only the fourth largest company on AIM, and in danger of slipping below Abcam too.

The US performance was also behind plan after its new Atlanta warehouse failed to keep up with strong demand. ASOS said:

"Whilst very encouraging for the longer term, this caused a significant short-term despatch backlog which we have now cleared."

Overall sales growth of 13 per cent for the second quarter was weaker than consensus forecasts, but this was offset by a 40 basis points improvement in the retail gross margin as ASOS stuck by guidance for the full year.

Source: TradingView (*) Past performance is not a guide to future performance

Numis Securities said: "Whilst this implies an acceleration in top-line growth across the second half, this looks to be supported by underlying demand in the US and impending investments into the proposition.

"Together we believe Q2 could mark a turning point in momentum, and retain our enthusiasm for the ASOS investment case."

Numis has a price target of 5,000p.

Analysts at UBS are more cautious, with a price target of 3,500p. They said:

"The sales miss is disappointing, although maintaining guidance may alleviate longer term concerns."

These updates came in a busy week for the retail sector, with Ted Baker (LSE:TED), Next (LSE:NXT) and Kingfisher (LSE:KGF) all due to report.

Shares in the trio were marginally higher today.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.

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