Online fashion retail firm ASOS (ASC) delivered an unexpected return to profitability in the three months to May thanks to self-help measures.

The shares, which were down nearly 40% year-to-date at a decade-low, jumped 14% to 375p on heavy volume.

HOW DID ASOS RETURN TO PROFIT?

While sales for the third quarter were down 14% on last year on a constant-currency basis to £859 million, in line with estimates, EBIT (earnings before interest and taxes) increased by £20 million signaling a return to profitability and putting the business on track to post second-half EBIT of between £40 million and £60 million as forecast.

The firm put its improved performance down to ‘deliberate actions on capital allocation to improve profitability’, claiming it had achieved around £200 million of cost savings and ‘profit optimisation’ so far this financial year and expected that figure to reach £300 million by the end of the fourth quarter.

As well as cutting input costs such as freight charges, the firm reduced its inventories by around 15% and its first-half order intake by 36% with the aim of repeating the process in the first half of its 2024 financial year starting in September.

Chief executive José Antonio Ramos Calamonte pulled no punches, saying the reason the firm went from net cash of over £400 million in the 2020 financial year to net debt of more than £150 million last year was because the firm bought far too much stock which it failed to sell.

‘While underlying issues were undoubtedly compounded by unpredictable demand and disrupted supply chains during the pandemic, it was clear that significant changes were required to the way the business was operating’, he commented.

He therefore focused on two issues – buying less stock and turning what the firm had into cash, and improving profit on each order.

‘This approach is not revolutionary: internally, our strategy is known as 'Back to Basics' because that's what it is. The build-up of stock based on ASOS' view of e-commerce as having an 'infinite aisle' was exacerbated by the perfect storm created by unpredictable demand and global supply chain disruption. While it's a frustrating issue to solve, we have a clear plan to fix things and we are making great progress.’

The next phase is to grow the business again, but for the time being the firm is leaving its full-year guidance unchanged and isn’t revising its ‘cautious’ top-line forecasts for the next few year.

‘There is no instant fix, and the necessary changes will take some time, but we are making great progress’, summarised the chief executive.

WHAT DO ANALYSTS THINK?

The retail team at Berenberg described the trading update as ‘pleasing’ in terms of the return to profitability and the chief executive’s rationale for his current strategy.

‘Also pleasing is the company's continued expectation to have reduced inventory by 20% at year-end. Furthermore, there is a significant improvement still to come in FY24, with the company guiding to inventory of below £600 million as at year-end, which would be a further c30% reduction. This should allow the business to generate meaningful positive free cash flow in the coming financial year’.

Edison's head of research Neil Shah was more even-handed, calling it a ‘mixed’ trading update reflecting ‘unfavourable external circumstances mitigated by internal operational changes’.

‘The returned profitability doesn’t signal a return in popularity for online clothes shopping; instead, it reflects strategic actions on the part of ASOS. Revenue continued to fall, as did sales, showing that the group still feels the effects of a post-pandemic return to in-person shopping.

‘What we have seen from ASOS over the past few quarters is the company trying to balance this reduced consumer demand through prudent operational changes: reduced inventory numbers, improved stock turn, and faster clearances of unsold stock. This latest trading update provides the first real sign of these policies coming to fruition.’

LEARN MORE ABOUT ASOS

 

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