FTSE slips again, European banking names slump and ASOS is in the doldrums

“Another day, another decline for key equity indices. European stocks were in the doldrums as investors fretted about inflation, politics, consumer spending and more,” says Danni Hewson, Financial Analyst at AJ Bell.

“Corporate news flow is picking up which is giving investors a reason to want to trade the markets, but mixed messages from these businesses is making it hard to call which way equities will move next.

“The FTSE 100 fell 0.9% to 7,550 with defensive stocks including utilities and insurers among the worst performers.

“Rolls-Royce and London Stock Exchange both took a tumble on negative broker comment while investors appeared to be banking some profit in AstraZeneca following its recent strong run on the market.

“Mining and oil stocks enjoyed a small rally amid a pick-up in commodity prices once again. Brent Crude moved back above $100 a barrel.

“The FTSE 250 fell by nearly 1% with all sectors apart from energy in the red. Bucking the trend was industrial parts distributor Diploma which soared by 9% after a better than expected trading update.

“In Europe, Deutsche Bank slumped 10% and Commerzbank dropped nearly 9% after reports that a big investor had sold a chunk of shares in both companies.”

ASOS

“It’s a tough life being a retailer in 2022 and the boom times for online operators experienced during the various lockdowns seem like a lifetime ago.

“ASOS has gone from an operating profit to a loss, its margins are declining, and it has moved from a net cash to net debt position. That’s not the direction of travel one would expect from the once online retail superstar.

“The outlook for the business is gloomy given the financial pressures on households around the world from the rising cost of living, as well as higher costs of running the business.

“ASOS appears to be pinning its hopes of stronger sales linked to specific events or periods in the year to drive sales, such as its customers loading up on clothes for their summer holiday or buying a smart jacket to go to an Easter family gathering.

“It also seems intent on spending big to get its brand in front of shoppers. Marketing activity may drive sales, but it still needs to get a good return on that investment, so keep a close eye on profit margins.

“The company has some difficult decisions to make if it wants to improve its profits. One area is to look at return rates. For years, customers have treated ASOS and many other fast fashion retailers as a two-stage transaction. Buy multiple sizes of the same items and send back the ones that don’t fit. This is costing ASOS a lot of money and the only way to discourage this activity is to start charging customers to return products. Although this action risks dampening demand, more retailers are going down this path and so it wouldn’t be out of the ordinary.

“The big question is whether now is the appropriate time to look at such a strategy. Retailers will need all the business they can get if consumers are more reluctant to open their wallets. ASOS’s target market is predominantly younger people and they might be the ones on lower incomes, and so they might be disproportionately hit by energy bills now taking up a larger chunk of their take-home pay.

“Now is probably the worst backdrop for trading that ASOS has seen since the global financial crisis and the retailer will be hoping things can only get better from here.”

These articles are for information purposes only and are not a personal recommendation or advice.