– Revenue down 3% in four months to December
– Full-year guidance left unchanged
– ‘Significant’ second half profitability and cash improvement expected
Unloved online fast fashion retailer ASOS (ASC) delivered a further decline in sales over the four months to December 2022 including Christmas as the Topshop brand owner suffered a significant drop-off in demand from UK customers.
However, shares in the FTSE 250 retailer rallied 16% to 680p on the absence of another profit warning and signs new CEO José Antonio Ramos Calamonte is taking firm action to sort the business out.
ASOS continues to expect ‘significantly improved’ profitability and cash generation in the second half of the year to August 2023 and beyond, albeit after a first half loss.
There was also relief as ASOS reiterated its full year cash outflow guidance of between zero and £100 million and said it expects to deliver a ‘significant’ improvement in gross margin in the second half.
GROWTH DAYS LONG GONE?
ASOS’ rapid growth days seem long gone as the fashion retailer faces tough competition from brick and mortar retail rivals and wrestles with issues including inflationary pressures on its customers, a normalisation of returns rates and mounting costs.
Total group sales softened 3% to £1.34 billion in the four months to New Year’s Eve as the website for fashion-loving 20-somethings continued to grapple with volatile trading conditions.
UK sales sank 8% due to weak consumer sentiment and delivery market disruption in December.
Elsewhere, sales fell in the US and Rest of the World regions, although EU sales ticked up 6% supported by price increases and strong customer growth in the Netherlands and Ireland.
ASOS also reported a 10 basis point gross margin decline to 42.9% driven by the need to slash prices to clear its bloated inventory.
ASOS expects a loss for the first half of 2023, driven by ‘usual profit phasing’, inflationary headwinds and high product return rates. These headwinds are expected to persist into the second half, but will be more than offset by accelerating benefits from Calamonte’s ‘Driving Change’ agenda and the reduced use of air freight.
Calamonte insisted ASOS is ‘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 return on investment (ROI).
‘At the same time, we are working to reinforce our credibility as a leading destination for our fashion-loving customers.’
Shore Capital said: ‘Next’s (NXT) trading update last week confirms our view that online appears to be back to the trend line and will continue to increase its penetration against the physical channel, albeit at a modest pace.
‘However, we think ASOS is a vulnerable player in this context, noting our full year 2023 pre-tax profit (forecast) is 15% below consensus (£26 million).’
AJ Bell investment director Russ Mould explained Calamonte ‘doesn’t want to go back to the old days where the key focus was sales growth. His focus is now on profitable growth and generating good returns from the money invested in the business.
‘It’s good to have a plan and a vision, but achieving it is another matter. ASOS is still sitting on too much inventory and is having to slash prices to clear these stockpiles. Sales continue to decline in most of its geographical locations.
‘The market reaction would suggest ASOS is now a pure recovery story and faith is being put in the new boss to achieve a positive outcome and investors don’t appear to be troubled by the latest weak sales and margin metrics, hence the share price jump on the news. However, the market will only wait so long to see the fruits of ASOS’ labour with regards to the turnaround efforts.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Tom Sieber) own shares in AJ Bell.