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ASOS plc (ASC) Ordinary 3.5p

Sell:365.60p Buy:367.10p 0 Change: 0.80p (0.22%)
Market closed Prices as at close on 23 February 2024 Prices delayed by at least 15 minutes | Switch to live prices |
Change: 0.80p (0.22%)
Market closed Prices as at close on 23 February 2024 Prices delayed by at least 15 minutes | Switch to live prices |
Change: 0.80p (0.22%)
Market closed Prices as at close on 23 February 2024 Prices delayed by at least 15 minutes | Switch to live prices |
The selling price currently displayed is higher than the buying price. This can occur temporarily for a variety of reasons; shortly before the market opens, after the market closes or because of extraordinary price volatility during the trading day.

HL comment (1 November 2023)

ASOS reported full-year underlying revenue £3.5bn, down 11% on a like-for-like basis and ignoring exchange rate impacts. Lower active customer numbers were the main driver, falling 9% to 23.3m.

There was an underlying operating loss of £29.0m compared to a profit of £44.1m last year, as order volumes fell and discounts were used to help clear excess stock. Price increases elsewhere helped improve profit per order by more than 30%.

Net debt increased from £152.9m to £319.5m. Free cash outflows narrowed from £339.8m to £213.0m as clearing excess inventory helped free up cash.

Full-year sales are expected to decline by 5-15% in the new financial year, with double-digit declines continuing in the first half before returning to growth in the final quarter. Net debt is also expected to be reduced.

The shares fell 6.1% following the announcement.

Our view

ASOS is in the midst of a transformation, and profitability rather than growth remains the top priority. The transition isn't pretty, with sales declining at double-digit rates and the group turning loss-making. Sales are expected to keep moving lower in the new financial year but under the hood, there are early signs that ground-level operations are improving.

Before we dive into performance, 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, and that's driving expectations of significant revenue declines. For now, improvements in profitability and cash flow will 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

  • Forward price/sales ratio (next 12 months): 0.13

  • Ten year average forward price/sales ratio: 1.45

  • Prospective dividend yield (next 12 months): 0.0%

  • Ten year average prospective dividend yield: 0.0%

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.

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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.

Previous ASOS plc updates

Data policy - All information should be used for indicative purposes only. You should independently check data before making any investment decision. HL cannot guarantee that the data is accurate or complete, and accepts no responsibility for how it may be used.

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Trades priced above the mid-price at the time the trade is placed are labelled as a buy; those priced below the mid-price are sells; and those priced close to the mid-price or declared late are labelled 'N/A'.