ASOS – sales decline as expected

ASOS revenue was down 18% for the 26 weeks to 3 March 2024, as discounts were used to help clear excess stock.

Business transformation plans remain on track. The group is ahead on plans to improve stock efficiency and reduce inventory by 20%, back to pre-COVID levels (c.£600mn) by year-end.

Free cash outflows narrowed from £260mn to £20mn as clearing excess inventory helped free up cash. Cash on the balance sheet stood at £330mn, up 6.5% on last year.

There was no change to full-year guidance, including a 5-15% sales decline and positive cash generation.

The shares rose 3.1% in early trading.

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 signs that ground-level operations are improving.

Back in May last year, it took steps 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. This cash injection has provided the wiggle room to execute the ongoing transformation which includes removing unprofitable brands from the platform and re-evaluating the returns proposition.

The ongoing drive to slim down inventory has made good progress too. Having reduced stock levels by 30% last year, it’s ahead of targets to cut a further 20% by the year-end. The discounts used to help clear this excess stock have hurt the top line though, and that action looks set to continue into the second half with more deadwood left to clear. But once all this excess inventory is off the books, it should provide some tailwinds to ASOS' margins moving forward.

Despite an improving outlook on the profitability front, there are still challenges to navigate. Active customer numbers were trending lower last year. This means for now, profitability and cash flow will have to come from streamlining current operations and squeezing more out of each customer. This needs to be managed carefully. Other retailers like Next are closing the gap, and compromising on what gives ASOS an advantage in service, like convenient delivery and returns, could impact long-term growth.

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. 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.