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Footasylum Says Margins Hit Over Too Much Discounting

Footasylum isn’t faring well for the moment.

Citing “some of the most difficult trading conditions seen in recent years,” the U.K. footwear retailer lowered its gross margin expectations for FY19 Tuesday, causing its shares to fall sharply.

Footasylum sells brands like Nike, Adidas and Under Armour online and in the 70 brick-and-mortar locations it operates in the country, marketing largely to an audience of “on-trend” 16-24-year-olds. The company blamed a market backdrop of higher-than-expected discounting across the retail spectrum for the lowered expectations, which precipitated more promotional and clearance activity from the retailer.

This, of course, led to shrinking margins for the Rochdale, U.K.-based corporation despite increased revenue across all channels for the 18 weeks leading up to Dec. 29, compared to the same timeframe last year. Sales were up 5 percent in-store at 63.7 million pounds ($81.21 million), which the company says was in spite of the expansion of three locations and five new store openings. Online sales were up 28 percent to 36 million pounds ($45.89 million) and are up 30 percent year-to-date—accounting for a total of 33 percent of all revenue taken in by the footwear retailer.

Combined revenue from all retail, wholesale and online channels was up 14 percent in the period, for a total of 102.3 million pounds ($130.41 million).

“In the context of the current tough conditions on the high street, we are encouraged to have delivered revenue growth across all of our channels and major product categories, with online and wholesale continuing to perform particularly well,” Barry Brown, executive chairman for the organization, said in the trading update.

The company expects short-term losses in the coming months as it implemented a cost-saving initiative to push margins back to manageable levels.

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Footasylum now expects an adjusted EBITDA of less than half of FY18’s 12.5 million pounds ($15.94 million) haul for the year ending in February.

“The short‐term outlook is undeniably challenging, and we continue to maintain our focus on cash, working capital and inventory management, as well as reducing costs across our operations,” Brown said. “The current trading conditions have led to significant discounting and promotional activity across the sector, and this, in turn, has impacted our gross margin expectations for FY19.”

After the announcement, Footasylum shares fell as much as 28 percent. A recovery pushed prices back up, but by the end of trading, shares had fallen to 27.5 pence ($0.35), a full 15.4 percent lower than prices at the opening bell. Reuters reports that shares have now fallen 86 percent for the retailer after listing on London’s AIM market in November of 2017.

Now that retailers have begun to report holiday trading information, a clearer picture of how the U.K. performed over a holiday that was challenging for all but the best-positioned retailers in the country is forming. Earlier reports suggested that some businesses, like Next Plc., may avoid the troubles others have faced with solid omnichannel strategies, but some retail analysts say healthy holiday reports will be outliers in the U.K.