Times still tough for ASOS but progress is being made

By

Sandra Halliday

Published
Jan 12, 2023

The festive season trading statement from ASOS was closely watched on Thursday for any signs of recovery at the fashion e-tail giant.

And the company clearly thinks its recovery is underway, even though there were plenty of negative numbers in the release. It said it had delivered “significant progress” on its Driving Change agenda in the last four months of last year (or Period 1 of its new financial year, as it calls it).

As a result, the Topshop owner is expecting a “significant improvement in profitability and cash generation” in the second half.

Some of the actions the company is taking to boost its recovery prospects include winding down three storage facilities (one in Europe, one in the UK and one in the US) in H2; rationalising office space; removing 35 unprofitable brands from the platform by the end of H1; introducing low-single-digit price increases for own-brand; optimising marketing spend and reallocating investment to improve return on investment; and reducing staff costs by around 10% “via previously reported action on headcount”.

REVENUE DROP

But what actually happened in the past four months? Revenue was down 3% on a constant currency basis (CCY) excluding Russia, “broadly in line with expectations, reflecting challenging trading conditions and prioritisation of structural profitability improvements and cash generation through a more disciplined approach to capital deployment”.

Total group sales actually fell 6% CCY to £1.336 billion, although they were down 4% on a reported basis.

UK total sales dropped 8% to £591.3 million, reflecting weak consumer sentiment. This was “particularly significant in September, which was impacted by national news flow” (that month was dominated by mini-budget chaos and the death of the Queen). And December was also affected by disruption in the delivery market. This resulted in earlier cut-off dates for Christmas and New Year deliveries, and ASOS reduced marketing spend in response. In addition, there was a strong comparative period in December 2021, as the Omicron Covid variant boosted online retail.

But EU total sales rose 6% CCY to £417.3 million and rose 7% on a reported basis. This was driven by “improved basket economics supported by price increases, and customer growth, with the Netherlands and Ireland notably strong”.

US total sales fell 2% CCY but rose 15% reported to £198.1 million, “with slower wholesale performance acting as a drag on retail sales”.

And rest-of-world sales were down 31% CCY and down 30% reported at £129.8 million, But with Russia taken out of the mix, they fell only 10%. The figures reflected “implementation of a range of strategic measures, including a reduction in performance marketing spend to optimise return on investment, and changes to delivery thresholds and charges”.

The company said active customer numbers were flat year on year at 25.5 million on the back of the “annualisation of benefits of Covid tailwinds to customer acquisition”.

And it added that while its adjusted gross margin (excluding the impact of a previously announced stock write-off) was “broadly flat" (actually down 10bps to 42.9%), “actions taken on pricing and the reduced use of air freight drove an encouraging progression through the period relative to the prior year”. That said, the reported gross margin declined by 690bps to 36.1%, although a “significant improvement” is expected in H2.

The company continues to expect an H1 loss, “driven by usual profit phasing, headwinds from inflation and annualisation of elevated return rates”. These headwinds are expected to persist into H2, “but will be more than offset by accelerating benefits from [the] Driving Change agenda and previously highlighted tailwind from freight”.

CEO José Antonio Ramos Calamonte said of all this: “We are undertaking necessary strategic and operational changes, with our focus shifting from prioritising top-line growth to building a more relevant and competitive fashion business with a disciplined approach to capital allocation and ROI. At the same time, we are working to reinforce our credibility as a leading destination for our fashion-loving customers.

“We have made good early progress against a number of measures to simplify the business, including repositioning our inventory profile, reviewing our operational model in our top markets and reducing our cost base. While there is more to do, I am pleased by the progress made in this period and am confident in the direction we are going. We retain ample balance sheet flexibility and reiterate our expectations for FY23.”