ASOS plc (ASC) Ordinary 3.5p

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ASOS expects full-year (2025) revenue to come in slightly below market expectations, amid soft consumer demand.

Underlying cash profit (EBITDA) rose over 60% year-on-year, reflecting higher gross margins and cost savings - but is now expected at the lower end of the £130-£150mn guided range.

ASOS also mentioned that it delivered a modest free cash inflow for the year.

For the full year 2026, the group expects profit and free cash flow to be in line with market expectations.

The shares fell 12.9% in early trading.

Our view

Second-half trading has been a little softer than expected for ASOS, and markets reacted badly to profits now expected at the low end of the guided range. But the reaction looked a little overdone to us, with plenty of signs that ASOS is making progress on its turnaround.

After a final clear-out and a £100mn write-down at the end of last year, inventory levels are now much healthier. The work has turned to re-engaging customers and getting full-priced items out the door. We’re not concerned about soft sales 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 a year ago, 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 is unclear.

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 LSEG. 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.

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