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ASOS - revenues fall in key markets

ASOS saw its first-half revenue fall 7% to £1.8bn...

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ASOS saw its first-half revenue fall 7% to £1.8bn,excluding the impact of exchange rates and suspended trade in Russia. This reflects a "challenging" trading environment, as well as reduced marketing activity and a lower amount of markdowns on prices. Sales were down in its key UK and US markets.

Underlying operating profit fell from £26.2m to a loss of £69.4m, driven by lower sales levels and the impact of higher costs. Wage inflation in the group's distribution centres has been especially high.

Net debt worsened from £62.6m to £431.7m as a result of higher borrowing and lower cash levels. Free cash outflow also worsened from £256.5m to £262.7m.

The group expects full-year sales to decline by a low double-digit percentage. Underlying operating profit is anticipated to land in the £40-£60m range.

The shares fell 8.1% following the announcement.

View the latest ASOS share price and how to deal

Our view

ASOS is still struggling to prevent a fall in its top line. The most recent declines are being blamed on the group's lower marketing spend, as well as reduced levels of discounting as it aims to prop up profitability. For now, lower freight rates coupled with price hikes on the group's own brands are helping to keep the underlying gross margin broadly flat.

There's been a big drive to clear out excess stock, which has come down 9% in the first half. There's further work to be done on this front, but getting excess stock off the books should provide some longer-lasting relief to margins moving forwards.

On the cost-cutting side, the group's already delivered around £100m in savings in the first half, with a further £200m expected to materialise in the second half. And despite wage inflation continuing to be an issue, these cost savings are expected to return the group to profitability in the second half of the year.

Times are tough. ASOS' position as a middle of the road retailer means it's particularly vulnerable to consumers with shrinking budgets. It's not as cheap as Primark, but customers aren't as resilient to a downturn as they are at luxury names. To a certain extent, this is out of the group's hands, and medium-term demand will depend on what happens to the economy. That makes it important to assess plans for long-term growth.

A thorough review of underperforming overseas markets, where extensive investment hasn't yielded strong results, has led the group to reallocate resources away from the US. Improving profitability has become the number one priority, but pushing cost cuts too far 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.

For all the challenges, 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 normal times, this makes the group more resilient than other online retailers, in our opinion. The Premier programme, which offers free delivery for a year, is key to driving customer loyalty, profitability, and has potential to reach more customers too. 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.

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.

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: 10th May 2023