RBC Capital downgrades Asos after profit warning

RBC Capital Markets downgraded Asos to ‘outperform’ from ‘top pick’ on Wednesday, slashing the target price to 3,200p from 7,700p "while uncertainty shadows the stock" following the online retailer’s shock profit warning earlier in the week.

RBC said it has underestimated Asos’s vulnerability to a more promotional market. The bank said it was reducing its estimates by 55-60%, hence the target price cut, to reflect the "new reality", although having assessed the risk/reward, it is compelled by the opportunity the current share price creates.

It removed the stock from its ‘European Equity Large Cap Best Ideas’ list.

The business model isn’t broken, but the macro risk has heightened, RBC said.

"The industry backdrop has significantly deteriorated in 2019, and despite its structural tailwinds, Asos is evidently not immune. However, we continue to believe that its industry-leading proposition…and pace of innovation will enable Asos to continue taking share in its large addressable market."

Asos shares tanked on Monday after it downgraded its guidance for the year as weaker trading in November and heavy discounting took their toll.

The company said increased discounting, coupled with the unseasonably warm weather during the last three months reduced its average selling price, which has not been compensated by higher units per basket. As a result, average basked value is now lower year on year. This has driven higher variable costs through both its distribution and warehouse cost lines.

At 0950 GMT, the shares were down 4.9% to 2,472.64p.