ASOS loss widens, but it highlights foundations laid for profitability return
ASOS took an upbeat stance in announcing its half-year results on Wednesday, talking of how it's executing its strategy and creating strong foundations for a return to profitability. But there’s no getting away from the fact that the figures this time didn't look good.
Group revenue fell to £1.84 billion in the six months to the end of February from just over £2 billion a year earlier. That was down 8%, or 10% at constant currency (CC), and down 7% CC excluding Russia.
The adjusted gross margin fell to 42.9% from 43.1% and adjusted EBIT was a loss of £69.4 million from a profit of £26.2 million a year earlier. The gross margin fell to 36.1% from 43.1% with a much wider reported pre-tax loss of £290.9 million, compared to a £15.8 million loss a year ago. But this included £203.5 million of adjusting items, mainly linked to its Driving Change agenda.
It talked of ongoing challenges in the operating environment, but said it's on track to deliver its full-year targets including more than £300 million of Driving Change benefits. Actions already taken should drive major profitability benefits in H2. And it has also seen an inventory reduction of around 20% with H1’s 9% reduction being slightly ahead of plan. The adjusted gross margin is also starting to improve, and it's forecasting positive H2 EBIT of £40 million-£60 million.
The company said the H1 revenue decline, reflected both “deliberate actions on capital allocation to improve profitability and the challenging trading backdrop”.
The Driving Change actions it took account for around 50% of the revenue decline since December “but are driving improving order economics”.
During the half, UK sales fell 10%, while Europe was flat, the US down 7% and RoW down 12%, partly due to a focus on profitability over top-line growth.
But it continued to grow its share of its core UK online retail market among its main 16-35 demographic and has increased its share of its customers’ wallets.
H2 so far has seen similar sales momentum but the gross margin rate improving and it’s predicting H2 sales (CC excluding Russia) to decline in low double digits. But the adjusted gross margin will be up around 200 bps.
ASOS has been making some major changes to the way it operates.
Its new commercial model comprises “a comprehensive change in [our] approach to buying and merchandising, improved stock management discipline and reduced complexity in our logistics network to ensure that [our] fashion-loving 20-something core customer base is exposed to cutting edge fashion curated in ASOS's own unique way”.
This is intended to create “a more engaging customer experience with exposure to more inspirational, relevant product; and a higher proportion of more profitable full-price sales”.
Current product lead times mean there’s a lag between operational change and visible results. But it’s been “simplifying the product journey, including increasing flexibility in its buying processes, re-setting its stock profile and closing ancillary warehouse space”.
The changes have had some negative impacts on the SS23 offer and performance, but the newly formed central merchandise planning team is “driving a more dynamic approach to stock management, facilitating a reduction in intake volumes while restoring width to the assortment” for AW23 and should increase stock turnover to pre-pandemic levels by the end of FY24.
Its actions should also “improve relevance and hence full-price sell-through” by increasing flexibility in the ASOS product assortment. On its own-brand offer, the company is currently running a 'Test and React' pilot using UK suppliers across a small number of product lines. It’s stress-testing its ability to reduce product lead times from concept to site to around two weeks in certain circumstances.
FOCUS ON PROFITABILITY
Other actions have included it no longer buying from 35 brands it identified as unprofitable and reviewing country profitability. A differentiated approach has been taken to remedy the issues facing certain countries. For example, free standard delivery was removed in five non-core European countries, delivery charges and thresholds were introduced or increased in a number of RoW markets and delivery prices were adjusted across the US. It has seen “significant improvements in the underlying profit contribution from all our key territories during the period”.
CEO José Antonio Ramos Calamonte said of what’s clearly been (and continues to be) a busy time for the firm: “Our focus is on improving our core profitability, prioritising order economics over top-line growth and I am pleased with the strategic and rapid operational progress against some very challenging trading conditions.
“These measures will create a more sustainably profitable and cash generative business. While some of these changes have impacted short-term sales growth, there are many causes for optimism as we progress through the second half. I am very confident of our return to sustainable profit and cash generation in the second half of the year and beyond.”
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