ASOS plc (ASC) Ordinary 3.5p
HL comment (12 April 2022)
Half year revenue grew 4% to £2.0bn, ignoring the effects of currency movements. Supply chain challenges weighed on growth across all regions, despite which the UK and US delivered sales growth of 8% and 11% respectively. As expected, Covid related benefits seen last year unwound, contributing to underlying pre-tax profit falling from £112.9m to £14.8m.
Guidance for the full-year remains unchanged, apart from the previously announced removal of Russia's contribution. However, management warned of increased risk as "the full impact of recent inflationary pressure on consumers and the potential impact on discretionary spend are yet to be felt".
The shares fell 3.3% following the announcement.
Consumer spending habits are starting to return to normal. For online retailer ASOS, that comes as somewhat of a double-edged sword. A substantial uplift in demand for going-out wear has obvious benefits for the fashion retailer. But getting out the house more also means more returned clothing, which hurts profit.
First half profits took a nasty fall from last year as Covid benefits unwound as expected, but looking forwards, wider pressures from supply chains and inflation are near term concerns. Despite some £50m of cost savings so far this year, gross margins declined 1.9 percentage points.
The second half of the year will likely be accompanied by further discounting as broader inflation weighs on consumer wallets. That'll add more pressure on margins, but it's hard to say how much. Inflation's impact on consumer finances is only now starting to have a real impact, so the next quarter will be telling.
It's too early to judge whether the pandemic has permanently increased online shopping demand too. The return of high Street shopping will undoubtedly move some spending away from online channels. Executing ASOS' expansion plans under tricky broader conditions won't be easy.
When it comes to growth, it's overseas markets in the EU and especially the US that hold the key to long-term expansion. That's why it was disappointing that supply chain issues meant the group couldn't meet demand for its products in these areas.
Those issues should hopefully iron themselves out and stock levels are significantly up in anticipation for the summer months, which should also help ASOS better-capture demand. However, if there is too much excess stock, ASOS may be forced to pull out the sale stickers again, which would be bad news for both margins and the brand.
An area of future growth which doesn't directly rely on ASOS' customer habits, is the growing partnership fulfilment arm, where brands supply inventory and ASOS collects a commission on sales. Progress in this higher-margin division will likely play a big part in the group's plan to have operating margins above 8% in the future. Initial results look promising, but we'd like further proof of sustained momentum as product ranges are expanded.
All of these strategic turning points come at a time when the CEO and Chair are leaving the business. Any change of senior leadership brings an element of transition and strategic risk.
ASOS has some exciting growth prospects. Its strong proposition and growth plans in the US mean the long-term picture is still attractive in our view. But looking to the near-term, there's significant hurdles to overcome and that's reflected in the valuation, which is a long way below the longer-term average.
ASOS key facts
- Price/earnings ratio: 15.8
- Ten year average Price/earnings ratio: 51.9
- Prospective dividend yield (next 12 months): 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.
Half-Year Results (constant currencies)
In the UK, total sales rose 8% to £895.5m, and there was an 8.8m (+13%) increase in active customers. Growth was supported by continued strong performance from the recently acquired Topshop brands, with Face + Body and Sportswear notable contributors. The group had to reduce prices on slow moving stock left over from Spring and Summer, leading to average basket size (ABV) falling 4%.
Growth in Europe was slower, sales grew 1% to £577.4m as customers returned to the High Street particularly in France. Active customers were up 6% as the Premier proposition looks to be making strides and Sportswear performed well. In Germany, the Topshop brands saw sales more than double. ABV fell 3% reflecting a higher level of price reductions.
In the US, sales grew 11% to £252.7m despite supply chain challenges meaning the group couldn't fully service demand. Retail sales were supported by successful promotions, notably those around the Superbowl and Presidents' Day. Topshop's US integration looks to be progressing well with sales up triple digits. ABV grew 2% and active customers improved 6% on last year.
The Rest of World region posted sales of £278.5m, a drop of 10% as a combination of low product availability and the return to High Streets weighed on performance.
Gross margins fell 1.9 percentage points to 43.1%. Price increases were needed in the second quarter to help ease pressures from increased costs and higher clearance activity. Increased costs across the board meant operating expenses rose 11% to £867.6m. As return rates normalise, at a higher level than last year, distribution costs were on the rise along with Warehousing costs where wage inflation was felt.
The group ended with net debt of £62.6m, down from a net cash position last year. That comes as higher investment in inventory impacted cash flow, with a free cash outflow of £256.6m.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
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Previous ASOS plc updates
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