ASOS reported full-year underlying revenue £3.5bn, down 11% on a like-for-like basis and ignoring exchange rate impacts. Lower active customer numbers were the main driver, falling 9% to 23.3m.
There was an underlying operating loss of £29.0m compared to a profit of £44.1m last year, as order volumes fell and discounts were used to help clear excess stock. Price increases elsewhere helped improve profit per order by more than 30%.
Net debt increased from £152.9m to £319.5m. Free cash outflows narrowed from £339.8m to £213.0m as clearing excess inventory helped free up cash.
Full-year sales are expected to decline by 5-15% in the new financial year, with double-digit declines continuing in the first half before returning to growth in the final quarter. Net debt is also expected to be reduced.
The shares fell 6.1% following the announcement.
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Our view
ASOS is in the midst of a transformation, and profitability rather than growth remains the top priority. The transition isn't pretty, with sales declining at double-digit rates and the group turning loss-making. Sales are expected to keep moving lower in the new financial year but under the hood, there are early signs that ground-level operations are improving.
Before we dive into performance, we'd be remiss not to mention the major steps taken back in May to shore up the balance sheet. Around £80m of funds were raised through issuing new equity shares and £275m worth of debt has also been refinanced.
To be clear, equity issues are not usually a good sign for existing shareholders. Cash-strapped companies tend to issue new equity only when they really need to, because it waters down existing shareholders' ownership in the company. But given ASOS' net debt and cash outflows were rising, it wasn't a complete surprise to see the group resort to this measure.
However, the cash injection provides some wiggle room to execute the ongoing transformation. The plan to improve profitability involves removing unprofitable brands from the platform and re-evaluating the returns proposition. Alongside lower shipping costs, this has already started to have a positive impact on margins, and gross margin ticked 1.5 percentage points higher in the second half.
And the drive to right-size the disproportionately large level of inventory has made very good progress too, down around 30% year-on-year. The discounts used to help clear this excess stock have hurt the top line though, and that action looks set to continue into the new financial year with more deadwood left to clear. But once all this excess inventory is off the books, it should provide further tailwinds to ASOS' margins moving forward.
Despite the progress on the profitability front, there are still challenges to navigate. Active customer numbers were trending lower last year, and that's driving expectations of significant revenue declines. For now, improvements in profitability and cash flow will have to come from streamlining current operations and focusing on squeezing more out of each customer.
And, as part of the profitability drive, ASOS reallocated resources away from international markets, where extensive investment has so far yielded weak results. But cutting costs in areas like this could be problematic in the long run. International markets, especially the US, hold the key to the group's future growth, and sacrificing investment in these markets now could come back to bite ASOS when conditions recover.
Ultimately, there are long-term opportunities for ASOS, but short to medium term challenges shouldn't be overlooked. The cash injection creates some breathing space while management gets profitability back on track, but brings with it additional pressure to deliver. While the current valuation looks attractive, investors should expect a bumpy ride.
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.
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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