Online fast fashion retailer ASOS (ASC) swung to a loss after what Shore Capital labelled a ‘lacklustre’ performance in the first half to 28 February 2022.
Yet shares in the website for ‘fashion-loving 20-somethings’ ticked up 1.4% to £15.60 after ASOS said it expects sales growth to accelerate in the second half as it laps easier comparatives and benefits from the return of event- and holiday-led demand.
There was relief as ASOS reiterated full year guidance, despite the suspension of its business in Russia, though the retailer also warned the external environment has ‘become more challenging’.
The firm added there was ‘greater risk than normal as the full impact of recent inflationary pressures and the potential impact on the discretionary spend on our customers is yet to be felt’.
SALES FALL FLAT
ASOS posted broadly flat sales of £2 billion in the half as the benefits from the pandemic eased with shoppers able to head back to high streets while supply chain constraints impacted stock availability and crimped growth across all regions.
Demand was also dampened by sporadic lockdowns, notably in Europe.
Pre-tax profits of £106.4 million gave way to a reported loss of £15.8 million after £31 million of adjusting items including costs incurred in launching a new strategy and shifting its listing from AIM to the Main Market.
Losses also reflected heavy spending on marketing and the margin pinch from soaring warehouse labour and freight costs.
Julie Palmer, partner at Begbies Traynor, pointed out the push Asos got during the pandemic as locked-down consumers splashed their cash online ‘has now dissipated with high street rivals fully open’.
In the face of such headwinds and with soaring inflation eating into consumer spending power, Palmer said it is ‘no surprise’ that shares in ASOS have ‘collapsed since its Topshop takeover and tripling of profits just a year ago’.
Nevertheless, ASOS bosses are hopeful sales growth will accelerate this year, highlighting improvements in stock levels, a return of event and holiday-led demand and an easing of supply chain issues.
GLOOMY OUTLOOK
‘Questions still remain about the potential timeframe to rebuild operating margins back towards the previously achieved level of 4% and, indeed, the 8% target margin post the Partner Fulfils programme implementation,’ said Shore Capital.
‘While this should be read as an encouraging statement from ASOS, we think it will be received with scepticism: can the business deliver on what it promised, despite the lacklustre performance in H1? In addition, the business is still looking for its next CEO - who is expected to join and embrace the strategy presented to the markets in November; until then, it is challenging to have confidence in how the company will navigate the current environment.’
Danni Hewson, financial analyst at AJ Bell, commented: ‘ASOS has gone from an operating profit to a loss, its margins are declining, and it has moved from a net cash to net debt position. That’s not the direction of travel one would expect from the once online retail superstar.
‘The outlook for the business is gloomy given the financial pressures on households around the world from the rising cost of living, as well as higher costs of running the business.’
Hewson continued: ‘The company has some difficult decisions to make if it wants to improve its profits. One area is to look at return rates. For years, customers have treated ASOS and many other fast fashion retailers as a two-stage transaction. Buy multiple sizes of the same items and send back the ones that don’t fit. This is costing ASOS a lot of money and the only way to discourage this activity is to start charging customers to return products. Although this action risks dampening demand, more retailers are going down this path and so it wouldn’t be out of the ordinary.
‘Now is probably the worst backdrop for trading that ASOS has seen since the global financial crisis and the retailer will be hoping things can only get better from here.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
