A keyboard and a shopping cart are seen in front of a displayed ASOS logo in this illustration picture taken October 13, 2020. REUTERS/Dado Ruvic/Illustration/

LONDON, June 16 (Reuters Breakingviews) - Online fashion retailers require a radical change of operating model. Shares in ASOS (ASOS.L), Boohoo (BOOH.L) and Zalando (ZALG.DE) have shed as much as two-thirds this year as inflation makes customers send back more clothes. Scrapping free returns, as 69 billion euro Zara-owner Inditex (ITX.MC) has already done, is one sure-fire way to drive down costs. It’s also the beginning of the end for the “bedroom-as-fitting-room” business plan.

Selling cheap tops and shoes to 20-somethings is a fickle business. With no physical outlets, customers buy multiple items to arrive at the perfect shape, size and colour. Retailers like 820 million pound ASOS and 710 million pound Boohoo suck up the cost of free deliveries and free returns. The latter is particularly hefty. Besides physical collection, there’s washing, processing and then a potential discount to get a returned item to sell quickly again. With households tightening their financial belts, customers are sending more goods back. That drives up retailers’ admin costs, and crimps sales.

Established retailers have already ditched free returns. Britain’s Next (NXT.L) introduced a 1 pound charge in 2018 for certain online items sent back. Inditex followed suit in May with a 1.95 pound fee for all online returns in Britain. The main idea is make customers more disciplined in their buying habits. But the retailers can also argue that with fewer vans driving around to pick up unwanted garments they are becoming more sustainable.

Nevertheless, the shift is likely to hurt. In good economic times, free returns services can inflate sales - customers are more likely to keep items and forgo a refund if they are not feeling the pinch elsewhere. But with the UK, ASOS’s domestic market, mired in a cost-of-living crisis, the opposite is now true. Based on the company’s 3.3 times valuation multiple, the 300 million pounds lopped off ASOS’s market value on Thursday implies a nearly 100 million pound EBITDA hit. That’s 40% of this year’s earnings before interest, tax, depreciation and amortisation, according to analyst forecasts compiled by Refinitiv. Faced with such a lose-lose situation, the idea of charging customers for returning clothes doesn’t look so dumb.

British online fashion retailer ASOS said on June 16 it would miss this year’s profit forecasts after a significant rise in product returns from its customers, most of whom are in their 20s.

The company, which also appointed a new chair and chief executive, said it expected revenue to grow 4% to 7% in the year to the end of August. Adjusted pre-tax profit would be between 20 million and 60 million pounds, it added.

Analyst estimates compiled by Refinitiv had forecast pre-tax profit of 83 million pounds.

Rival Boohoo said on June 16 its revenue fell 8% year-on-year to 446 million pounds over the three months to May 31. Boohoo said revenue growth for the full 2022-23 year was expected be "low-single digits", with adjusted EBITDA margins of between 4% and 7%.

Shares in Asos and Boohoo were down 26% and 15% respectively by 0857 GMT on June 16. Germany’s Zalando was down 11%.

Editing by Ed Cropley and Pranav Kiran. Graphic by Vincent Flasseur.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Source: Reuters

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