ASOS looks to better times ahead

“Fast-fashion retailer ASOS is sticking to its full-year guidance for sales growth, its preferred profit measure and cash flow, so the shares are rising sharply, thanks to the absence of any further bad news in the first-half results,” says AJ Bell investment director Russ Mould.

“Granted, they were trading at their lowest mark since 2009 ahead of the figures, so expectations were already low, thanks in part to last year’s profit warnings, January’s uninspiring trading update and also the latest woes of Superdry and Dr Martens.

Source: LSEG Datastream data

“The first-half results remain ugly, with little improvement in the headline figures and not much more vigour in the underlying ones, once the £140 million cost of mothballing the Lichfield warehouse is taken out of the equation. Even ASOS’ preferred profit measure of adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) got marginally worse, as the firm recorded a £16.4 million loss on the basis of this measure, against a £4.6 million profit in the first six months of the previous fiscal year.

“However, the best news may come from the balance sheet, not the profit and loss account. Chief executive José Antonio Ramos Calamonte can point to great progress in reducing inventory and the balance of unsold goods has already fallen to his target of £600 million, some six months ahead of schedule.

Source: Company accounts

“Inventory days are starting to normalise and lower stock levels on the balance sheet should have two major benefits. First, it should mean less discounting, higher margins and thus improved profits. Second, it should boost cash flow and reduce borrowing – and less debt means less risk and less risk can mean a higher share price, all other things being equal.

“Net debt did creep up a little in the first six months of the year, thanks to lower operating earnings, higher interest payments and also higher trade payables but if Mr Calamonte is correct in his view that profits will improve in the second half of this financial year then net debt could start to recede.

Source: Company accounts

“That would represent another major step forward for Mr Calamonte and his team, which will include new chief financial officer Dave Murray, as they seek to undo the damage caused by prior management teams who allowed costs, inventories and debt to rise as they chased sales.

“The next leg of the turnaround is to meet the three targets laid down by Mr Calamonte for this financial year alongside the results for the prior period last November – a drop in sales of between 5% and 15%, a profit (based on the metric of adjusted EBITDA) and positive cashflow (helped by lower inventory).

“There is still work to do, since sales fell 18% year-on-year in the first half and ASOS recorded an adjusted EBITDA loss of £16.3 million. The company needs a good second half for sure, although the lower inventory and lower rate of discounting should help.

“Analysts currently expect an 8% drop in full-year sales, which implies 3% year-on-year growth in the second half.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

“The consensus estimate for EBITDA has dribbled lower since last November’s results and analysts are looking for £107 million, still a drop from £125 million a year ago. Further marked improvement is expected for fiscal 2025 and Mr Calamonte’s more optimistic comments for next year chime with that view, even if ASOS is not expected to make a profit on statutory measures until fiscal 2026.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

“Those forecasts show that there is still much work to be done, especially against the backdrop of a difficult economic environment in the UK and Europe. Competition from Shein and Temu, to name but two, changes in customer tastes (especially among some elements of Generation Z who seem to favour less, more curated and vintage-oriented consumption) and ongoing scrutiny of supply chains from consumers and regulators alike mean that neither sales growth nor margin expansion can be taken completely for granted, even as stock levels diminish to more comfortable levels.

“Decreases in both active customer numbers and average order frequency in the first half suggest that competition is as fierce as ever.”