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ASOS - profits return despite falling revenues

ASOS' third-quarter revenue fell 14% to £858.9m, ignoring the effect of exchange rates, reflecting declines across all geographies.

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ASOS' third-quarter revenue fell 14% to £858.9m, ignoring the effect of exchange rates, reflecting declines across all geographies.

There was a return to profitability this quarter, with underlying operating profit up £20m on last year, despite the fall in revenue.

Active customers fell by 0.8m to 24.1m in the quarter, reflecting a focus on profitable sales rather than growth. Around £200m of cost savings have been realised year-to-date, with the group saying it's on track to reach its full-year target of around £300m.

As previously announced, ASOS raised around £80m of funds last month by issuing new equity shares, as well as refinanced £275m worth of debt.

Full-year guidance has been maintained, with sales expected to decline by a low double-digit percentage and underlying operating profit anticipated to land in the £40-60m range.

The shares jumped up 15.5% following the announcement.

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Our view

ASOS' top line continues to fall as the group prioritises profitability over growth. This decline was largely expected though, and in line with previous full-year guidance.

The group's recently taken major steps to shore up the balance sheet. Around £80m of funds were raised through issuing new equity shares and £275m worth of debt has also been refinanced.

To be clear, equity issues are not usually a good sign for existing shareholders. Cash-strapped companies tend to issue new equity only when they really need to, because it waters down existing shareholders' ownership in the company. But given ASOS' net debt and cash outflows have been rising, it wasn't a complete surprise to see the group resort to this measure.

However, the cash injection provides some wiggle room to execute the ongoing transformation. The plan to improve profitability involves removing unprofitable brands from the platform and re-evaluating the shipping and returns proposition. This has had an immediate impact and we've seen underlying operating margin improve by 3.5 percentage points this quarter.

Costs are also getting stripped back. The majority of the £200m cost savings achieved so far this year were structural, which should provide long-lasting relief to headwinds that have inflated the group's cost base. And the group's on track to deliver another £100m in cost savings by the end of the year too.

And the drive to right-size the disproportionately large level of inventory is making good progress too. There's still plenty of work to be done on this front, but getting this excess stock off the books will provide some tailwinds to margins moving forwards.

Despite the progress on the profitability front, there are still challenges to navigate.

Lower marketing spend and lower levels of discounting are the leading causes of falling revenue this year, and we're cautious about seeing revenues track much higher in the near future. For now, improvements in profitability and cash flow will likely have to come from streamlining current operations.

As part of the profitability drive, ASOS reallocated resources away from the US, where extensive investment has so far yielded weak results. But cutting costs in areas like this could be problematic in the long run. International markets, especially the US, hold the key to the group's future growth, and sacrificing investment in these markets now could come back to bite ASOS when market conditions recover.

Ultimately, there are long-term opportunities for ASOS, but short to medium term challenges shouldn't be overlooked. The cash injection creates some breathing space while management get profitability back on track, but brings with it additional pressure to deliver. While the current valuation looks attractive, investors should expect a bumpy ride.

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.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 15th June 2023