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Asos profits drop 89% YoY, but new CEO pledges turnaround

Image courtesy of Asos

Online fashion retailer Asos has recorded a year-on-year 89% drop in adjusted profits before tax, falling to £22m. 

According to the company, The UK, Asos’ core operation, delivered good performance (+7%) despite the weakening consumer environment. This has been supported by a curated offer and differentiated visual language, leading to a growth in active customer base ahead of the Company average (+5%) and a further increase in Premier customers (+6%), resulting in an increase in average order frequency (+5%) 

Strong Topshop performance (+105%) reinforcing revenue growth in the UK, US and EU and driving margin expansion.

While the results are weak, they are in line with guidance issued by the company earlier this year based on forecasts of the impact of macroeconomic events on the company. The Group saw an increase in return rates this year, rising above pre-pandemic levels from May onwards, leading to higher inventory levels across all its fulfilment centres, which was worsened by the conflict in Ukraine and saw Asos exit Russia in early March. 

While delivering revenue growth in the UK and the US of 7% and 10% respectively, growth in Europe was at 2% while Rest of World declined by 9%, with the Group stating that delivery disruption in the first half of the year as responsible. More positively, the Topshop brand has seen increased revenue growth across all key territories, with an overall sales growth of 105%, which exceeded 200% in the US. 

To help tackle this, the company has a new CEO – José Antonio Ramos Calamonte – in place with a diagnostic of the issues Asos faces, including revamping international operations that have lagged expectations on ROIC, particularly in the US and a need to review and renew the customer acquisition and commercial model. He will also be looking at supply chain operations, which have become inefficient in the face of supply chain disruption and macroeconomic challenges, the company says. 

Ramos Calamonte also wants to focus on the need to better leverage data and digital improvements to successfully engage the customer; and the need to strengthen the leadership team and refresh the company culture, he  

He has pledged that, over the next 12 months, Asos will deliver on four actions targeted at improving its ability to navigate the existing uncertainty, focused on renewing its commercial model and improving inventory management, simplifying and reducing its cost profile, ensuring a robust and flexible balance sheet and reinforcing the leadership team and refreshing the culture. 

In parallel, he says, management is focused on creating a business capable of generating long-term sustainable growth for investors and a comprehensive review is underway of Asos’ capital allocation. This includes a review of the operating model, marketing investment, capital and resource allocation and its deployment across geographies, customer acquisition channels and digital and data capabilities.

He says: ““ASOS is a strong business with a compelling brand, customer offer and fashion credibility, with dedicated and passionate employees. Against the backdrop of an incredibly challenging economic environment, this unique combination has enabled our business to deliver a resilient performance this financial year in the UK – but I know we as a Company can achieve far more. 

“Today, I have set out a clear change agenda to strengthen Asos over the next 12 months and reorient our business towards the future. This includes a number of decisive, short-term operational measures to simplify the business, alongside steps to unlock longer-term sustainable growth by improving our speed to market, reinforcing our focus on fashion, strengthening our top team and leveraging data and digital developments to better engage customers. 

“On the basis of the actions I have set out today, the team and I will work resolutely to emerge from these turbulent times as a more resilient and agile business – all the time guided by our purpose, to give our customers the confidence to be whoever they want to be.”

What the experts think

Analyst Russell Pointon, Director at Edison Group comments: “The full year results come with Asos shares recently plunging after the retailer confirmed this week that it is in discussion with lenders over changing the terms of a £350m revolving credit facility, to give it “significantly increased financial flexibility, against the uncertain economic backdrop.” This is much needed given management’s expectations of zero free cash flow generation, at best, in the coming year. 

“New CEO José Antonio Ramos Calamonte has his work cut out, outlining a series of measures to improve the business, including a renewed commercial model, stronger order economics and a lighter cost profile, a robust balance sheet and a reinformed leadership team and refreshed culture. 

“With the macroeconomic environment remaining significantly volatile, Asos is rightly concerned about consumer demand, expecting a decline in apparel over the next year. The Group will need to focus on the strong brands in its portfolio, its loyalty-based Premier programme and continue to invest in the customer experience through technological investment if it is to weather the continued storm. It will also need to reinforce its efforts in marketing, with a lack of prioritisation slowing customer acquisition this year.”

Chris Daly, CEO of the Chartered Institute of Marketing (CMA), adds: “This morning’s disappointing results come as little surprise, as supply chain bottlenecks and the ensuing cost-of-living crisis continue to plague the retail industry. Now the job for Asos is to spark consumer interest and demand again, and to become indispensable in the minds of its customers.

“The CMA’s ongoing investigation into Asos over their [sic] potential use of “misleading eco claims” has also hampered the retailer’s progress. Amid growing efforts to clampdown on greenwashing, the retailer must refrain from using vague language to market items as environmentally friendly, or weak criteria to decide if products are sustainable. We know that consumers are increasingly sceptical of brands’ sustainability efforts, with our research finding that 63% believe many brands only get involved with sustainability for commercial – not ethical – reasons. Building consumer trust in these challenging times is a prerequisite for sustained success, so it’s essential that Asos’ next steps are in the right direction.”

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