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ASOS - customer returns weigh

Sales in the third quarter rose 4% to £983.4m, excluding Russian operations and the impact of exchange rates.

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Sales in the third quarter rose 4% to £983.4m, excluding Russian operations and the impact of exchange rates. Growth in the US and UK offset declines in the EU and Rest of World, but higher return rates, rising freight costs and discounting meant gross margins declined 3.10 percentage points to 44.0%.

A higher number of customer returns and market volatility, means full-year revenue growth is now expected to be 4-7% and pre-tax profit between £20m and £60m, down from previous guidance.

The group also announced that Jose Antonio Ramos Calamonte, former Chief Commercial Officer, will take over as CEO.

Shares were down 16% following the announcement.

View the latest ASOS share price and how to deal

Our view

ASOS is starting to feel the sting as the cost-of-living crisis bears down on consumers. People are returning more items and that's taking a bite out of profitability.

Despite some £50m of cost savings at the half year, gross margins declined 1.9 percentage points. Management's expecting more pain ahead as well, with a profit warning sending a sharp shock through the group's valuation.

That's thanks in part to rising costs as international distribution gets more expensive. But importantly it's also due to more discounting as the group looks to lure in cash-strapped shoppers. This is an effective way to clear unwanted inventory, but there are consequences as well. Margins suffer and breaking out the sale stickers erodes brand power, something ASOS has been working to build.

At the half-year, ASOS was sitting on piles of excess inventory in anticipation of strong demand over the summer, as kinks in the supply chain were ironed out, the group was hoping to shift the excess stock. The US in particular was plagued by supply chain issues, which kept a lid on sales. But evidence that consumers are starting to snap their wallets shut suggests that'll be easier said than done. Cooling demand in international markets could have far-reaching implications, as these are the countries ASOS is relying on for future growth.

It's not all doom and gloom, though. An area of future growth which doesn't directly rely on ASOS' customer habits, is the growing partnership fulfilment arm, where brands supply inventory and ASOS collects a commission on sales. Progress in this higher-margin division will likely play a big part in the group's plan to have operating margins above 8% in the future. Initial results look promising, but we'd like further proof of sustained momentum as product ranges are expanded.

Adding a cat amongst the pigeons is the introduction of new CEO Jose Antonio Ramos Calamonte. It's good news he's come from within the business, which should make for a smoother trasition. But any change of senior leadership brings an element of transition and strategic risk.

ASOS' long-term growth opportunities look promising, but the near-term hurdles are starting to muddy the picture. How ASOS navigates the oncoming economic weakness will make or break the group's long-term potential. Medium-term uncertainty is reflected in a valuation that's a fair way below the longer-term average.

ASOS key facts

All ratios are sourced from Refinitiv. 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.

Third Quarter Results (constant currency)

Sales in the UK rose 4% to £431.8m, led by a strong performance in occasion-wear for holidays, weddings and events. This offset higher return rates. EU sales fell 2% to £294.0m as return rates rose beyond pre-pandemic levels in some territories.

Sales growth in the US was 15%, helped by strong demand for Topshop, promotional activity and demand for going out wear.

The Rest of World saw sales fall 8%, though Australia returned to growth as Premier was restarted.

The group's Premier membership grew 19%.

Lower profits and higher inventory levels are expected to feed through to net debt between £75m and £125m at the full year.

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.

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. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 16th June 2022