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ASOS - sales fall but profitability showing signs of improvement

ASOS saw its full-year revenue fall 11% on a like-for-like basis, ignoring exchange rate impacts.

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ASOS saw its full-year revenue fall 11% on a like-for-like basis, ignoring exchange rate impacts. Active customer numbers were down 9% to 23.3m.

Underlying gross margin improved by around 1.5 percentage points as lower shipping costs offset the negative impact of discounted sales. Profit per order improved, and return rates were lower than the group expected.

Inventory levels fell by around 30% year-on-year. Cash and undrawn facilities at year-end were around £430m.

Full-year operating profit is expected to be at the lower end of the group's £40-£60m guidance. Second-half underlying free cash flow is anticipated to be around £60m, down from £150m due to timing impacts which are likely to reverse in September and October.

The shares were broadly flat following the announcement.

View the latest ASOS share price and how to deal

Our view

Profitability rather than growth remains the priority at the online fashion giant. Sales in the final quarter were down 15%, as a wet July and August drove a slowdown in the UK clothing market.

We'd be remiss not to mention the major steps taken back in May 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 were 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 returns proposition. Alongside lower shipping costs, this has already started to have a positive impact on margins, and gross margin ticked 1.5 percentage points higher in the second half.

And the drive to right-size the disproportionately large level of inventory has made very good progress too, down around 30% year-on-year. The discounts used to help clear this excess stock have hurt the top line though, and that action looks set to continue into the new financial year with more deadwood left to clear. But once all this excess inventory is off the books, it should provide further tailwinds to ASOS' margins moving forward.

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

Active customer numbers were trending lower last year, meaning we're cautious about revenues tracking much higher in the near future. For now, improvements in profitability and cash flow will likely have to come from streamlining current operations and focusing on squeezing more out of each customer.

And, as part of the profitability drive, ASOS reallocated resources away from international markets, 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 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 gets 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: 26th September 2023