ASOS’ full-year underlying revenue fell by 14% to £2.5bn. A small increase in average basket value wasn’t enough to offset double-digit declines in active customer numbers.
Underlying cash profit (EBITDA) increased by 64% to £132mn, but missed market expectations of £138mn. The improvement was driven by a higher full-price sales mix and much lower supply chain costs.
Free cash flow fell from £38mn to £14mn. Net debt, including lease liabilities, improved from £0.6bn to £0.4bn.
This year’s guidance points to further growth in underlying cash profit to between £150-180mn. Free cash flow is expected to remain broadly flat.
The shares fell 7.1% in early trading.
Our view
ASOS delivered much better profitability last year, helped by less discounting and cost cuts throughout the business. Despite the improvement, the pace of progress wasn’t as fast as markets were expecting, leading to a poor share price reaction on the day.
The market’s reaction looks a touch overdone to us. We’re not concerned about soft sales for now - it's part of the strategic shift as the group focuses on more profitable customers and sales. Efforts to streamline operations are bearing fruit, and inventory levels are in a much healthier place now too.
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 recently refinanced some of its debt at interest rates several percentage points lower than the prior level, saving the group around £5mn per year. That’s a very good sign. Lower interest rates on debt mean lenders are becoming less cautious about lending money to ASOS, due to its improving financial performance.
There are still plenty of challenges to navigate. Active customer numbers fell 14% last 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 have been upping their game in the fast fashion space. 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. That’s led to sales across Europe and the US falling at a faster pace than on home soil. It’s not clear what the long-term plan for the US is. It’s a difficult market to crack, as many peers have found out the hard way.
Focus now turns to the final stage of the group’s turnaround, re-engaging its leftover and loyal customer base through new features. A new and improved ‘for you’ page and an AI-powered outfit generator are just some of the ways ASOS is looking to convince shoppers to spend more.
Ultimately, there are long-term opportunities for ASOS, but short-to-medium term challenges shouldn't be overlooked. Transformation activities look to be progressing well, but as other retailers try and 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.
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 LSEG. 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.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.