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ASOS - inflation hits consumer spending

Sales over the year rose 4% to 3.9 billion pounds, excluding Russian operations and the impact of exchange rates.

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Sales over the year rose 4% to £3.9bn, excluding Russian operations and the impact of exchange rates. Growth was supported by the UK and US which offset declines in Rest of World. Growth in the second half was lower than expected as inflationary pressures weighed on consumer spending.

Underlying profit before tax of £22.0m was in line with guidance, and down from £193.6m the previous year.

Speaking to the 2023 financial year, the group sees "significant volatility" in the wider environment making it "very difficult" to predict consumer demand.

The shares rose 9.4% following the announcement.

View the latest ASOS share price and how to deal

Our view

Armed with a new CEO, ASOS treated markets to a strategy update alongside its full year results. A more streamlined approach to capital expenditure comes alongside plans to write down a chunk of stock, as the group looks to trim costs and improve resilience.

A refreshed approach is welcome news, as the group comes off a year where consumers behaviour has slowly deteriorated in the face of higher inflation. Piles of excess stock has needed to be marked down to help entice cash strapped customers and returns rates have remained elevated over the second half. That's put pressure on gross margins and if it continues, will erode the brand name - a vital asset in this industry.

The new strategy calls for less markdowns to help push margins back up, that relies on shifting the excess stock first. That's going to have a hefty impact on results in the first half, with benefits starting to come through later in the year.

A thorough review of underperforming markets, such as the US where extensive investment hasn't yielded strong results, means new marketing and investment strategies are on the cards. It's clear change was needed with international markets key for future growth prospects.

ASOS does have some strong foundations to build on.

It's set up well to offer something for everyone, with options all along the price scale. In an environment where consumers are watching costs carefully, that should be an advantage. The Premier programme, which offers free delivery for a year, is key to driving customer loyalty, profitability, and has potential to reach more customers. There's even the option to hike the programme's price as it sits at the low end of the scale, though management haven't hinted to that yet.

The growing partnership fulfilment arm, where brands supply inventory and ASOS collects a commission on sales, also looks promising. ASOS isn't on the hook for holding inventory so there's less risk, whilst attracting higher margins. Progress 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.

Freshly negotiated terms on credit facilities mean the balance sheet looks to be in decent shape for now, whilst cost cutting exercises should bring cash flow back into positive territory toward the end of next year.

Ultimately, there are long term opportunities for ASOS but short to medium term challenges shouldn't be overlooked. That's reflected in a valuation that's come down significantly over the past year.

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.

Full Year Results

Sales in the UK rose 7% to £1.8bn as demand shifted to occasion wear, supporting average selling price growth. Growth was partly offset by higher returns rates as consumers faced increasing pressure over the period and discounting ramped up.

In the EU, sales grew 2% to £1.2bn as the region became increasingly exposed to higher energy costs and inflationary pressures. The region also saw a step up in return rates, trending above pre-pandemic levels.

US sales grew 10% to £531.4m supported by Topshop and Topman growth, the expansion of wholesale and a more locally relevant offer. Customer acquisition slowed in the second half as ASOS paused its broad reach marketing campaign in response to economic conditions.

Rest of World sales declined by 9% to £472.3m, impacted by continued delivery disruptions in the first part of the year.

ASOS saw a free cash outflow of £303.3m, which contributed to a net debt position of £152.9 compared to net cash the previous year of £199.5m.

New CEO, José Antonio Ramos Calamonte, has laid out a 12-month plan focused on "delivering key operational improvements and disciplined capital allocation" aimed at increasing gross margins.

The group's expecting to return to cash generation in the second half of the new financial year, with lower costs expected to offset inflationary headwinds and higher return rates.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 19th October 2022