ASOS plc (ASC) Ordinary 3.5p

ASOS’ first-half underlying revenue fell 18.0% on a like-for-like basis and ignoring exchange rate impacts. This comes as discounts were used to help clear excess stock.

Underlying loss before tax grew 32.6% to £120mn, driven by lower sales levels and the impact of profit initiatives.

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

Free cash outflows narrowed from £259mn to £21mn as clearing excess inventory helped free up cash. Net debt stood at £652mn, down 16.2% on last year.

There was no change to full-year guidance, including a 5-15% sales decline and a return to growth in the final quarter.

The shares rose 7.1% in early trading.

Our view

ASOS is undergoing a significant makeover, shifting focus to profitability and cash generation. The transition isn't pretty, with sales declining at high double-digit rates and the group remaining loss-making. But sales declines are set to ease in the second half and 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 £80mn of funds were raised through issuing new equity shares and £275mn worth of debt was also refinanced. This cash injection provided the wiggle room to execute the ongoing transformation which includes removing unprofitable brands from the platform and re-evaluating the returns proposition.

Behind the scenes, there are early signs that strategic ambitions are starting to bear fruit. Efforts have been made to streamline inventory levels and the group have cut £593mn in stock (£7mn away from pre-COVID levels). This move has led to a significant improvement in free cash flow, up around £240mn year-on-year, which can now be reinvested elsewhere in the business. Although there is still more work to be done, once this is accomplished, it should provide ASOS with some much-needed momentum.

Despite an improving outlook on the profitability front, there are still challenges to navigate. Active customer numbers have declined 14% year-on-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.

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