ASOS plc (ASC) Ordinary 3.5p

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ASOS’ underlying like-for-like revenue fell 13% to £1.3bn in the first half. The decline was driven by previous inventory reductions, which resulted in less discounted stock and lower sales volumes in the period. Active customer numbers fell 16% to 18.0mn.

Underlying cash profit (EBITDA) improved by £58.8mn to £42.5mn, due to lower amounts of discounting and a tight grip on costs.

Free cash outflows worsened from £21.1mn to £84.1mn. Net debt improved from £348.8mn to £275.8mn.

For the full-year, ASOS expects revenue growth to be towards the bottom end of current market forecasts (decline by 2-9%). Underlying cash profit is expected to improve by at least 60% to between £130-150mn.

The shares fell 2.9% in early trading.

Our view

As expected, ASOS’ sales fell at double-digit rates in the first half, as the group looked to remain firm on pricing. That’s helping to deliver exactly what investors want – improved profitability. But there’s still a lot of work to be done.

After a final clear-out and a £100mn write-down at the end of last year, inventory levels are now much healthier. While this will make sales comparisons tougher this year, as older, lower-margin items are no longer being sold, it should continue to boost profitability. We’re not concerned about the sales dip for now, as it's part of the strategic shift. The main focus is on improving profitability and cash flow, and early signs are promising.

While things are moving in the right direction, keep in mind that ASOS is still forecast to remain loss-making this year. To help shore up the balance sheet, it refinanced some of its debt back in September, but at much higher interest rates. The higher rates are a sign that lenders are being more cautious about loaning money to ASOS, due to its poor underlying performance of late.

There are still plenty of challenges to navigate. Active customer numbers fell 16% in the first half, partly due to the shift in focus away from less profitable items and customers. This means for now, improvements in profitability and cash flow will have to come from streamlining current operations and squeezing more out of each customer.

This transition needs to be managed carefully. Other retailers like Next, Shein and Temu are closing the gap. Compromising on what gives ASOS an advantage in service, like convenient delivery and returns, could impact long-term growth. The intense competition could also put downward pressure on pricing, which may further hamper efforts to rebuild the bottom line.

As part of the profitability drive, ASOS pulled back on investment in international markets. Many US orders are now fulfilled from warehouses in Europe, which brings tariffs into play. ASOS says it’s got the flexibility to tweak its sourcing and distribution model in response to help mitigate tariffs, but the potential financial impact isn’t clear yet.

Ultimately, there are long-term opportunities for ASOS, but short-to-medium term challenges shouldn't be overlooked. Transformation activities look to be progressing but as other retailers close the gap, there is additional pressure to deliver. While the current valuation looks attractive, investors should expect a bumpy ride.

Environmental, social and governance (ESG) risk

The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.

According to Sustainalytics, ASOS’s management of ESG risk is average.

The group has initiatives in place to manage the risks related to material ESG issues, but lacks strong policies and programmes in key areas. As part of the “necessary action” to return to growth, there has been a roll back on targets and disciplined action to improve the ESG credentials of the business.

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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