Asos posts profit despite double-digit drop in sales

Online fashion giant Asos has had a turbulent few years, impacted by supply chain delays during Covid which left it with millions of pounds worth of stock in the wrong season, as well as soaring online advertising costs and higher return rates, its margins have taken a battering.

But today it has posted some good news, with its ‘Driving Change’ turnaround strategy (launched a year ago) appearing to be making inroads, albeit with sales still in decline amid tougher trading conditions and stiff competition from the likes of Chinese ultra-fast-fashion giant Shein.

Total group sales fell 15% year-on-year for the fourth quarter to September 3, it said in a trading update today. Despite a stronger start to the period, this was followed by a “weaker performance in July and August amid a deterioration in the UK clothing market,” it revealed.

However, despite the decline in sales, it is set for another profitable quarter. And expects circa £300m of profit improvement and cost savings in line with its turnaround strategy, which will drive order profitability up more than 45% year-on-year.

As a result, EBIT will be around the bottom of the guided £40m to £50m, excluding refinancing costs, for the second half.

Asos said adjusted gross margin rose circa 150bps year-on-year in the second half, driven primarily by lower freight and duty costs, partially offset by tactical investment in promotional activity to prioritise stock reduction.

As such, inventory was down around 30% year-on-year ahead of guidance, supporting the transition to its new commercial model in FY24 and beyond.

In a bid to clear excess stock without damaging brand equity, it has launched new commercial deals, including partnering with off-price discount specialists Secret Sales. And it is also pivoting to a faster stock model, as the likes of Shein and others eat away at market share. 

Asos said its faster stock model is on track, with around 500 Test & React options launched on circa 2-week lead times, with about 60% of each product launch selling through in seven days and stock turning 3x faster than average.

“ASOS has delivered on the Driving Change agenda and as a consequence is a leaner and more resilient business twelve months after its launch,” said Asos CEO, José Antonio Ramos Calamonte.

“We have reduced our stock balance by circa 30%, significantly improved the core profitability of the business and generated cash against a very challenging market backdrop,” he added.

ASOS’ NEW COMMERCIAL MODEL: CASH IS KING

There are two key stages to Asos’ new commercial model – converting its current stock into cash and then turning stock faster on an ongoing basis to make its business model more cash generative. 

Calamonte said: “Over the last year (starting with our £130m stock write-down) we focused the business on selling excess stock and improving the way we buy stock – buying less on faster lead times with more flexibility. To achieve this, we have rewritten our commercial model to focus on speed – this means a better customer proposition, less inventory risk, higher margins and greater cash generation,” he explained.

He said the business had reduced inventory by about 30% during FY23 which required higher levels of discounting in the short-term as well as reducing intake, which has resulted in reduced width and newness, negatively impacting revenue. 

He expects this elevated level of discounting will persist through FY24, and notably through the new financial year, as it seeks to clear last year’s Autumn/Winter stock, which is now among its oldest inventory. 

“We remain on track to return stock to pre-COVID levels by the end of FY24 (reducing stock below £600m), which will importantly continue to drive down our net debt,” Calamonte said.

HOW ASOS IS IMPROVING PROFITABILITY

Calamonte said Asos’ new commercial model requires lower investment into discounting as well as potentially increasing basket value and customer lifetime value once fully operational, which will help improve profitability.

“We have already seen these benefits on a small scale through our Test & React trials with no promotional investment needed to sell through circa 60% of each product launch in seven days across circa 500 options produced to date, more than offsetting the higher cost of goods for product created under this model,” he explained.

“On our partner brands, our rollout of DTC (“Direct-to-Consumer”) solutions including Partner Fulfils will also reduce the risk of inventory overhang typical of branded product sold through our Retail model that is often ordered around 9 months ahead of the point of purchase,” he added.

He predicts these benefits will accelerate as it scales up flexible stock models. However, the core improvements it has implemented over FY23 to drive the more than 35% year-on-year improvement in order profitability and 100% improvement in H2 EBIT include:

• Targeted action to improve the behaviour of its least profitable customers including reduced marketing contact and restrictions on Buy Now, Pay Later solutions at checkout, with a positive impact on its return rate since these changes were introduced. It has also recently launched personalised marketing to improve the profitability of its entire customer base.
• Charging for returns in a number of non-core markets or introducing charges for returns made after fourteen days but within the twenty-eight day returns window (and hence maximising its opportunity to resell returned product at full price).
• Optimisation of the distribution network resulting in a c.20% reduction in our UK fixed warehouse cost per unit despite inflation headwinds.

“While some of these profitability measures have led to higher levels of churn (23.3m active customers at FY23, down c.9% YoY11 and c.3% from P3) we have exited our least profitable orders and customers as evidenced by the c.35% increase in profit per order over the period and lower than expected returns rate,” Calamonte said. 

“We are laying the right foundations for sustainably profitable and cash generative growth. We will provide a more detailed update on our FY24 strategy alongside our FY23 results,” he added.

Keep up-to-date with the latest business news and analysis over on Matt Haycox Daily. For all the latest news, insights and strategy, sign-up to the Matt Haycox weekly newsletter, below.