ASOS saw revenues drop 4% to £1.3bn during the four months to 31st December. This was broadly in line with expectations as the group faced challenging trading conditions. In the UK, ASOS' largest market, revenues fell from £645m to £591m, reflecting weak consumer sentiment and disruption in the delivery market.
Underlying gross margin was broadly flat at 42.9% year-on-year. This level was maintained due to actions taken on pricing and the reduced use of air freight.
The group's on track to reduce inventory levels by 5% in the first half of the year, with further reductions expected in the second half of the year too.
ASOS continues to expect a loss in the first half of its financial year, driven by headwinds from inflation. However, profitability is expected to resume in the second half of the year and beyond. This has led the group to reiterate its full-year guidance for cash outflow between -£100m to £0.
The shares rose 9% following the announcement.
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Our view
ASOS is still struggling to prevent a fall in its top line. The most recent decline was largely blamed on the UK's disastrous mini-budget, and December's delivery disruption as Royal Mail continued strike action. For now, underlying gross margins are being maintained by a series of cost-cutting and optimisation measures.
Excess stock levels have already been cut in half so far this year, and moves like winding down storage facilities and reducing headcount are in full flow. Getting excess stock off the books should provide some longer-lasting relief to margins moving forwards.
These changes should deliver more than £300m in savings, which is expected to return the group to profitability in the second half of the year. Achieving these savings targets will be key if the group is to regain its footing in a stumbling retail market.
A thorough review of underperforming markets, such as the US where extensive investment hasn't yielded strong results, means new marketing and investment strategies are on the cards. It's clear change was needed with international markets key for future growth prospects.
ASOS does have some strong foundations to build on.
It's set up well to offer something for everyone, with options all along the price scale. In an environment where consumers are watching costs carefully, that should be an advantage.
The Premier programme, which offers free delivery for a year, is key to driving customer loyalty, profitability, and has potential to reach more customers. There's even the option to hike the programme's price as it sits at the low end of the scale, though management haven't hinted to that yet.
The growing partnership fulfilment arm, where brands supply inventory and ASOS collects a commission on sales, also looks promising. 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.
Ultimately, there are long term opportunities for ASOS but short to medium term challenges shouldn't be overlooked. That's reflected in a valuation that's come down significantly over the past year.
ASOS key facts
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