The say clothes maketh the man (or woman). But do they make a fool-proof investment? Not for ASOS and Superdry shareholders today, as both the online fast fashion retailer and casual clothing companies’ shares are down heavily (both as low as -11.5%) following broker downgrades.

Why are both fashion retailers struggling today? Is it the sector read-across? Trade war worries? Brexit concerns? Despite being part of the same the sector, both stocks are are down for different reasons.

Analysts at Morgan Stanley downgraded ASOS to Underweight (a.k.a. “Sell”) and significantly reduced their medium-term target price to 3200p (25% downside from current price), citing the massive £400m that the retailer invested over the past 2 years to finance its aggressive expansion. But the breakneck pace of revenue growth (+20-30% YoY every quarter) can eventually result in a broken neck.

The company held £173m in net cash 2 years ago, but the piggybank was down to just £43m in September this year. ASOS thus spent £117m of that cash pot last year alone, meaning that it could not possibly finance growth to the same extent this year without taking on more external debt (which is set to grow) or talking to private equity investors.

ASOS is an online retailer, meaning that while it doesn’t need spend on bricks-and-mortar stores, it does have to spend heavily. As they say, revenues is vanity (all good), profits is sanity (growing nicely), but cash flow is reality (down sharply).

Balance sheets and P&Ls might be the bane of ASOS shareholders today, but with clothing peer Superdry, the picture couldn’t look more different. The high street clothing maker is set to report its half-year results tomorrow and the market is not optimistic about the company’s prospects.

In particular, analysts are worried about Superdry’s reliance on more expensive winter clothing to drive profit margin. Given that the weather hasn’t exactly dazzled UK with snow, demand for Superdry’s fleeces and multi-zip jackets is likely to be proven weak.

Superdry already warned markets in its early November trading update that jackets and sweats make up 55-60% of it Autumn-Winter sales and with atypically warm weather in the past few months, markets are pessimistic about Superdry’s results. A storm may be coming, just not the one the clothing company may have hoped for.

To be fair, Superdry has been trying to diversify its product focus, discontinuing many underperforming items and focusing more on segments such as womanswear/kidswear that would allow it to spread the eggs out of its heavily H2-weighted earnings basket. But the diversification programme that began this summer takes time (18 months by Superdry’s own estimates) and much of the focus tomorrow would be not just on the earnings figures, but also on any updates about the pace and success of this transformation. Could shareholders start clamouring for ex-CEO and co-founder Dunkerton to return?

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