ASOS plc (ASC) Ordinary 3.5p

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ASOS’ underlying revenue fell by 16% to £2.9bn on a like-for-like basis, in line with previously downgraded guidance. Increases in average basket value were not enough to offset falling customer and order levels.

Underlying cash profit (EBITDA) was at the top end of the group’s prior expectations, but still fell 44% to £80.1mn impacted by lower sales and heavy discounting to clear inventory.

Free cash flow improved from an outflow of £213mn to an inflow of £37.7mn, helped by much higher operating cash flow and lower investment expenditure. Net debt, including lease liabilities, remained broadly flat at £0.6bn.

In the new year, gross margin is expected to improve by at least three percentage points to above 46%. Underlying cash profits are expected to grow more than 60% to between £130-150mn.

The shares fell 6.6% in early trading.

Our view

ASOS’ full-year results were tough to read on the headline figures, with revenue and profits both down at double-digit rates. The focus is very much on improving profitability and cash generation, and on this front, there were some early positive signs.

With a final clear-out and a £100mn write-down at the end of last year, the move to right-size inventory levels is now complete. While this will make some tough comparable figures for sales this year, as these older and lower-margin items won’t be offered to customers, it should be beneficial for profitability.

To be clear, ASOS has remained loss-making. 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.

Offloading the Topman and Topshop brands has brought in plenty of cash to help pay these higher financing costs. But it’s a short-term solution and we’d like to see some concrete signs that profitability’s improving.

Despite some early signs of progress, there are still plenty of challenges to navigate. Active customer numbers fell 16% year-on-year, 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’ 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.

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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