ASOS expects full year profit before tax to be at the bottom of the guided range of £20-£60m, in line with market expectations. Sales growth, ignoring the effect of exchange rates, is expected to be around 2%, with net debt in the region of £150m.
Having seen good growth in June and July, sales in August were weaker than anticipated. This reflected the impact of inflationary pressures on consumers and a slow start to Autumn/Winter shopping.
ASOS will report full-year results on 12 October 2022.
The shares rose 2.1% following the announcement.
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Our view
ASOS is starting to feel the sting as the cost-of-living crisis bears down on consumers. People are returning more items and that's taking a bite out of profitability.
Despite some £50m of cost savings at the half year, gross margins declined 1.9 percentage points. Management's expecting more pain ahead as well, with full year profits expected at the bottom of the guided range - that'll put profit before tax at around £20m.
That's thanks in part to rising costs as international distribution gets more expensive. But importantly it's also due to more discounting as the group looks to lure in cash-strapped shoppers. This is an effective way to clear unwanted inventory, but there are consequences as well. Margins suffer and breaking out the sale stickers erodes brand power, something ASOS has been working to build.
At the half-year, ASOS was sitting on piles of excess inventory in anticipation of strong demand over the summer, as kinks in the supply chain were ironed out, the group was hoping to shift the excess stock. The US in particular was plagued by supply chain issues, which kept a lid on sales. But evidence that consumers are starting to snap their wallets shut suggests that'll be easier said than done. Cooling demand in international markets could have far-reaching implications, as these are the countries ASOS is relying on for future growth.
It's not all doom and gloom, though. An area of future growth is the growing partnership fulfilment arm, where brands supply inventory and ASOS collects a commission on sales. ASOS isn't on the hook for holding inventory so there's less risk, whilst attracting higher margins. Progress will likely play a big part in the group's plan to have operating margins above 8% in the future. Initial results look promising, but we'd like further proof of sustained momentum as product ranges are expanded.
Adding a cat amongst the pigeons was the introduction of new CEO Jose Antonio Ramos Calamonte back in June. It's good news he's come from within the business, which should make for a smoother transition. But any change of senior leadership brings an element of transition and strategic risk.
ASOS' long-term growth opportunities look promising, but the near-term hurdles are starting to muddy the picture. How ASOS navigates the oncoming economic weakness will make or break the group's long-term potential. Medium-term uncertainty is reflected in a valuation that's a big chunk below the longer-term average.
ASOS key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Third Quarter Results (constant currency, 16 June 2022)
Sales in the third quarter rose 4% to £983.4m, excluding Russian operations and the impact of exchange rates. Growth in the US and UK offset declines in the EU and Rest of World, but higher return rates, rising freight costs and discounting meant gross margins declined 3.10 percentage points to 44.0%.
A higher number of customer returns and market volatility, means full-year revenue growth is now expected to be 4-7% and pre-tax profit between £20m and £60m, down from previous guidance.
The group also announced that Jose Antonio Ramos Calamonte, former Chief Commercial Officer, will take over as CEO.
Sales in the UK rose 4% to £431.8m, led by a strong performance in occasion-wear for holidays, weddings and events. This offset higher return rates. EU sales fell 2% to £294.0m as return rates rose beyond pre-pandemic levels in some territories.
Sales growth in the US was 15%, helped by strong demand for Topshop, promotional activity and demand for going out wear.
The Rest of World saw sales fall 8%, though Australia returned to growth as Premier was restarted.
The group's Premier membership grew 19%.
Lower profits and higher inventory levels are expected to feed through to net debt between £75m and £125m at the full year.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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