Full-year gross merchandise value (GMV) declined by 5%, although growth returned in the fourth quarter. Trading improved across core markets, with the UK and Germany returning to growth in the second half and the US in the fourth quarter.
Adjusted cash profits (EBITDA) grew more than 25%, above the midpoint of the £150-180mn guided range (£167mn expected), driven by improved gross margins, lower returns rates and continued cost discipline.
Net debt is expected to fall by £75mn to around £110mn following the recent disposals of its Lichfield and Atlanta fulfilment centres.
The shares were up 6.5% in early trading.
Our view
ASOS' full-year update shows signs that the strategic overhaul is starting to deliver tangible results. Profitability continues to improve, gross margins have surpassed management's medium-term target, and GMV returned to growth in the fourth quarter. Importantly, customer trends are also stabilising, suggesting the group is moving beyond simply cutting costs and beginning to lay the foundations for sustainable growth.
We’re not concerned about the recent sales weakness. 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 and margins improving. 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.
Total active customers fell slightly, but trends are improving. Customer growth returned in the fourth quarter for the first time since 2022. The challenge now is converting these improving customer trends into sustained sales growth and free cash flow.
Things are moving in the right direction and the balance sheet is in a much healthier position, following a sharp reduction in net debt. But ASOS still needs to prove that the turnaround is more than temporary. The focus now is on whether stronger margins can be sustained while rebuilding a more valuable and loyal customer base.
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 on paper, 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.