ASOS’ underlying like-for-like revenue fell 14% to £1.1bn in the first half. This partly reflects the group’s shift towards a more flexible fulfilment model, where ASOS only receives a commission on the value of items sold. Active customer numbers were down 9% to 16.5mn.
Underlying cash profit (EBITDA) jumped 51% higher to £64mn. This was driven by gross margin improvements and continued efforts to reduce supply chain costs.
Free cash outflows rose by 10% to £93mn, due to higher interest costs on its debt. Net debt rose by £19mn to £295mn.
Full-year guidance has been reiterated, with underlying cash profit expected to be in the £150-180mn range, and broadly flat free cash flow.
The shares were broadly flat in early trading.
Our view
ASOS’ transformation continued to gain traction over the first half. While sales are still falling, management reiterated that underlying trends are improving. Alongside good work in trimming the cost base, the shares rallied over the day as markets digested the group’s progress.
We’re not concerned about soft sales for now. It's part of the strategic pivot to focus on more profitable customers and products, as well as a shift in the sales mix to include more fulfilment.
Fulfilment is where ASOS lists third-party products on its website and delivers them, but it doesn’t actually own the stock. As a result, it only banks its commission as revenue, rather than the full sales price. While that’s hurting the top line, it’s also protecting ASOS’ margins by reducing its inventory risk. If the goods aren’t selling as well as expected, it’s the third parties that must slash prices to sell them and take the financial hit.
Efforts to streamline operations are also bearing fruit, with fixed costs falling sharply. Contract renegotiations and supply-chain improvements are playing their part, and inventory levels are in a much healthier place now too.
Focus now turns to re-engaging its leftover and loyal customer base through new features. An 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, and data so far looks promising.
While things are moving in the right direction, keep in mind that ASOS is still forecast to remain loss-making at the bottom line this year. Debt levels are still moving in the wrong direction, so we’re keen to see the group move back into free cash flow generation in the near future.
There are still plenty of challenges to navigate. Active customer numbers fell 9% over the first half, 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.
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 to 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 strong.
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.