- Weak first half sales
- ‘Significantly’ higher earnings expected next year
- New finance director appointed
Shares in ASOS (ASC) rallied 10% to 366.2p in early dealings after the online fast fashion retailer maintained full year 2024 guidance and flagged progress in shifting its mountain of excess stock as CEO Jose Calamonte’s turnaround plan gains traction.
Nevertheless, the retailer’s transition to a new operating model is inflicting short term pain, as demonstrated by a plunge in first half sales, wider losses and a weakening of gross margins amid discounting to clear old stock.
FASHION VICTIM
Adjusted pre-tax losses widened from £87.4 million to £120 million in the half to 3 March 2024, while group revenue slumped 18% to £1.51 billion as the retailer pressed ahead with the ‘necessary actions’ needed to revive its fortunes under Calamonte’s ‘Driving Change’ recovery and growth plan.
ASOS enjoyed a boom during the pandemic but has struggled to grow post-Covid. Consumer shopping habits have changed, while heightened competition from the likes of Shein has also presented shoppers with cheaper alternatives. Management has cast 2024 as a transition year as it focuses on speeding up processes, launching new collections and shifting excess stock.
During the half, active customers were down 14%, average order frequency was down 8%, while total visits fell 14%. More encouragingly, ASOS’ free cash outflow was reduced to £21 million and net debt fell by £83 million to £349 million thanks to disciplined inventory and cost management.
ASOS stuck with its full year 2024 guidance for a 5% to 15% sales decline with positive adjusted EBITDA (earnings before interest, tax, depreciation and amortisation), positive cash generation and a reduction in debt.
Furthermore, adjusted EBITDA for full year 2025 is expected to be ‘significantly’ higher than the previous two years as the company sees the benefits of cost-cutting and stock actions with improved gross margins and higher full priced sales.
WHAT DID THE CEO SAY?
CEO Jose Calamonte commented: ‘At the beginning of this year we explained that full year 2024 would be a year of continued transformation for ASOS as we take the necessary actions to deliver a more profitable and cash generative business.’
He insisted ASOS is becoming ‘a faster and more agile business, and we are reiterating our guidance for the full year as we lay the foundations for sustainably profitable growth in full year 2025 and beyond.’
ASOS also announced the appointment of the experienced Dave Murray as its new finance director with effect from 29 April 2024. He replaces interim numbers man Sean Glithero.
EXPERT VIEWS
Russ Mould, investment director at AJ Bell, commented: ‘The main thing that currently matters with ASOS is clearing its mountain of excess stock, a ball and chain that’s been dragging the business down for a long time. It’s ahead of plan on this front, hence the share price has enjoyed a pop.
‘Naturally, having to flog old stock means selling at a discount and that eats into profit margins. It’s all well and good to run the stockpile down but that also fosters a nasty habit of customers getting used to very cheap prices. Weaning them off the habit will be hard and could be as big a hurdle to clear as the current excess inventory problem.’
Mould continued: ‘The company might give the impression it is getting back on track, but the numbers tell a different story. Half-year sales were down 18%, active customers fell by 14% and the average order frequency declined by 8.1%. Those are some seriously bad numbers and beg the question why the nation has fallen so out of love with ASOS.
‘More choice is one factor as rival names like Shein continue to take market share, consumers watching their pennies is another, but there must also be an element of ASOS offering products that simply don’t resonate with its customer base.’
Liberum Capital is bearish on the stock, believing ‘significant risks remain in the execution of the new strategy outlined by the group to improve profitability, especially in the current macroeconomic environment. While consumers continue to look for value, ASOS is forced to increase prices, reduce discounting and lower service levels to consumers. There is excess inventory in the market, as seen by ASOS’ struggles to offload inventory (it was forced to launch its own sample sales website, asossamplesale.com) and this should continue to hamper the move to more full price sales as consumer have many options from which to choose.’
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