ASOS expects its first-half sales to fall around 13%, ignoring exchange rate impacts. This was driven by lower volumes as the group chose not to engage in as much discounting
Underlying cash profit (EBITDA) is expected to land ahead of market expectations of £34mn, up from a £16.3mn loss in the first half of last year. The improvement was driven by the decrease in discounting and a tight grip on costs.
The shares rose 24.6% in early trading.
Our view
ASOS gave the market a glimpse into its first-half performance with a brief trading update. Sales fell at double-digit rates as the group chose to remain firm on pricing by not moving as many items to the sales racks. That’s had a significant impact on profitability, which looks set to beat analysts’ forecasts, causing a positive market reaction on the day.
After a final clear-out and a £100mn write-down at the end of last year, inventory levels are now much healthier. While this will make sales comparisons tougher this year, as older, lower-margin items are no longer being sold, it should boost profitability. We’re not concerned about the sales dip for now, as it's part of the strategic shift. The main focus is on improving profitability and cash flow, and early signs are promising.
While things are moving in the right direction, keep in mind that ASOS is still forecast to remain loss-making this year. To help shore up the balance sheet, it refinanced some of its debt back in September, but at much higher interest rates. The higher rates are a sign that lenders are being more cautious about loaning money to ASOS, due to its poor underlying performance of late.
There are still plenty of challenges to navigate. Active customer numbers fell 16% at year-end, partly due to the shift in focus away from less profitable items and customers. This means for now, improvements in profitability and cash flow will have to come from streamlining current operations and squeezing more out of each customer.
This transition needs to be managed carefully. Other retailers like Next, Shein and Temu are closing the gap. Compromising on what gives ASOS an advantage in service, like convenient delivery and returns, could impact long-term growth. The intense competition could also put downward pressure on pricing, which may further hamper efforts to rebuild the bottom line.
As part of the profitability drive, ASOS pulled back on investment in international markets. But cutting costs in areas like this could be problematic in the long run. Given international markets, especially the US, hold the key to the group's future growth, sacrificing investment in these markets now could come back to bite ASOS in the future.
Ultimately, there are long-term opportunities for ASOS, but short-to-medium term challenges shouldn't be overlooked. Transformation activities look to be progressing but as other retailers close the gap, there is additional pressure to deliver. While the current valuation looks attractive, investors should expect a bumpy ride.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, ASOS’s management of ESG risk is average.
The group has initiatives in place to manage the risks related to material ESG issues, but lacks strong policies and programmes in key areas. As part of the “necessary action” to return to growth, there has been a roll back on targets and disciplined action to improve the ESG credentials of the business.
ASOS key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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