ASOS plc (LON:ASC) has announced its trading statement for the three months ended 31 May 2023.
Summary financial results
| Three months to 31 May | Nine months to 31 May | |||||||||
| £m | 2023 | 2022 | CCY1,2,3 change (adjusted) | CCY1 change | Reported change | 2023 | 2022 | CCY1,2,3 change (adjusted) | CCY1 change | Reported change |
| UK total sales | 370.3 | 431.8 | (15%) | (14%) | (14%) | 1,174.0 | 1,327.3 | (12%) | (12%) | (12%) |
| EU total sales | 283.5 | 294.0 | (8%) | (7%) | (4%) | 870.1 | 871.4 | (3%) | (2%) | -% |
| US total sales | 121.2 | 141.9 | (21%) | (20%) | (15%) | 390.4 | 394.6 | (12%) | (12%) | (1%) |
| ROW total sales | 83.9 | 96.44 | (14%) | (14%) | (13%) | 265.0 | 374.94 | (13%) | (31%) | (29%) |
| Total group revenue5 | 858.9 | 964.14 | (14%) | (13%) | (11%) | 2,699.5 | 2,968.24 | (9%) | (11%) | (9%) |
Strategic update and P3 results summary
The Company continues to execute on its Driving Change agenda. The following progress was made during the period3:
· Return to profitability with P3 adjusted earnings before interest and tax (“EBIT”) up more than £20m year-on-year (“YoY”) and EBIT margin up 250bps YoY. On-track to deliver adjusted EBIT guidance of £40-60m in H2 FY23.
· This return to profit came despite revenue down 14%, as expected, and reflecting deliberate actions on capital allocation to improve profitability.
· c.£200m of profit optimisation and cost savings realised year-to-date (“YTD”). On track to deliver c.£300m of benefits targeted in FY23, which equates to c.£385m of gross annualised benefits.
· Profit per order up over 30%6 YTD versus last year driven by actions taken to improve profitability of underperforming brands and geographies.
· Adjusted gross margin7 up 350bps YoY supported by freight (c.200bps) and improvements in realised selling value and sourcing.
· Inventory down by c.15% on FY22, consistent with the target of a c.20% reduction by FY23, with 86% of stock less than 12 months old. H2 FY23 intake -36% YoY with option count down 30%. H1 FY24 intake expected to be down 33% YoY with option count -13%.
· Active customers8 down by 0.8m from the 24.9m reported at H1 FY23, reflecting a continued focus on improving the profitability of sales over the pursuit of growth at any cost.
· As announced on 25 May, the Company strengthened its balance sheet through a new, long-term £275m financing facility and c.£80m equity raise. The new capital structure provides ASOS with increased resilience and significant flexibility, free of any profit-based covenants. It is fully aligned with ASOS’ shift to its new commercial model, which includes reducing inventory, faster clearance of unsold stock and improving stock turn.
· The return to profitability and cash generation in H2 FY23 and beyond will further strengthen the balance sheet. H2 FY23 and full-year FY23 expectations are unchanged from the guidance issued in the H1 FY23 results announcement on 10 May 20239.
CEO review
Why is this the right plan?
At our FY22 results announcement, we reported net debt of £153m, down from a net cash position of £200m in FY21 and £408m in FY20. This decline was predominantly driven by the purchase of too much stock, with FY21 and FY22 intake c.50% higher than in the preceding two years. The issue was compounded by the sharp bounce back of store-based retail post-pandemic and the Russian invasion of Ukraine, which both triggered a deterioration in the global macroeconomic backdrop and resulted in ASOS exiting its Russian operations on 2 March 2022. We closed FY22 with £1.1bn of inventory, twice the size of our stock balance in FY20. In two years, the c.£560m increase in our net debt position was broadly equal to the c.£550m increase in our stock. While underlying issues were undoubtedly compounded by unpredictable demand and disrupted supply chains during the pandemic, it was clear that significant changes were required to the way the business was operating.
To do this, in October 2022 we set out four key pillars of our Driving Change agenda: 1. Renewed commercial model; 2. Stronger order economics and lighter cost profile; 3. Robust and flexible balance sheet; 4. Reinforced leadership & culture. But what does this really mean? We put in place a plan to turn the business around: to right-size our stock; to generate cash; to reduce our net debt; and to structurally improve our profitability. We started this turnaround process by taking decisive action on the most urgent issues and bringing in the people we need to make this happen.
We now have: i) long-term financing in place which provides significant flexibility, free of any profit-based covenants and giving us ample headroom to take the action we need to reset our commercial model and right-size our stock; and ii) the leadership team in place that can drive this turnaround, complementing the talent that built ASOS as a disruptive force with external experience and perspective that can make us even better. We have reduced inventory by 15% YTD and 86% of our current stock is less than 12 months old. We will reduce inventory levels by c.20% by FY23 year-end, supported by a reduction in H2 FY23 intake of 36%. A further significant reduction is expected in FY24 that will return inventory days to pre-Covid levels (reducing stock levels below £600m) and underpin a material improvement in cash generation next financial year.
It’s now about completing the right-sizing of our stock, which will further restore our balance sheet; and continuing to improve profitability so we can grow again while generating cash. Or put another way:
1. We turn the stock we have into cash and buy less stock;
2. We improve profit per order by: i) improving our gross margin (our sourcing, buying, pricing); and ii) focusing on profitable orders (particularly internationally);
3. With a profitable base established, we grow again by investing into customer acquisition and lifetime value.
There is no instant fix and the necessary changes will take some time, but we are making great progress. Taking each in turn:
1. We turn our stock into cash and buy less stock:
We are in the process of turning our stock into cash, which is driving our cash inflow in H2 FY23 and will also be a key driver of the material cash inflow we expect in FY24. The chart below demonstrates the mismatch between our intake and sell-through during FY21 and FY22, leading to the build-up of stock described above. While it can make sense that intake would be higher than sell-through when the business is growing, this should not be the case when sales are declining.
*For illustrative purposes
The difference between the sell-through of our stock compared to how much we buy will create a significant cash inflow in FY23 and FY24, as can be seen in the chart below. However, intake cannot be optimally reduced overnight and the process can create a temporary drag on sales as options are reduced.
At the time that our new approach was agreed, Spring/Summer 2023 (H2 FY23) orders had already been placed. This meant that reducing intake volume by 36% came predominantly through cutting options, rather than scaling back volume per option. This resulted in option count contraction of 30% with a consequent negative impact on sales. As we have placed new orders for Autumn/Winter 2023 (H1 FY24), it has been possible in many cases to reduce volume per option and hence create a more optimal stock profile offering better width to customers. For H1 FY24, we will reduce intake by 33% and option count by 13% YoY.
*For illustrative purposes
You might then question whether we can really sell this stock. Within the £1.1bn of stock we held at FY22, there was a proportion of old stock we felt could not be cleared efficiently through the ASOS platform. This amounted to c.£130m of stock written off10, which has mostly been extracted from our core network and is being cleared through external channels. With the oldest stock written off, we believe the remaining stock can be cleared through our platform in the normal course of business. This will mean we temporarily have more stock being cleared on promotion than we would ideally like under our new commercial model. However, this is reflected in our H2 gross margin guidance which gives us the flexibility to be more aggressive with our markdown, if necessary, to achieve the planned c.20% YoY reduction in inventory by year-end. We expect strong progress on clearing our stock through our platform over the next 12 months, generating a significant cash inflow in the process.
Under our new commercial model, when we don’t sell out in-season, we will clear stock faster. We will clear high fashion product after one season, while continuity product (for example denim, where shapes can stay relevant for several seasons) will typically be cleared after two seasons (i.e. product bought for Spring/Summer 2023 cleared after Spring/Summer 2024). This ultimately leads to a better realised price as discounting closer to the season requires shallower markdown. At present, 10% of our stock is less than 4 weeks old, 55% of stock is less than 26 weeks old and 86% of stock is less than 52 weeks old. Most of the stock we currently hold has therefore only been through one season and less than 25% was carried forward from FY22.
Our experience in the current trading environment is that when we create a product that really resonates with our customers and is priced correctly, full-price sales are very strong. Learning from this experience, we have taken steps to improve the value for money of own-brand product. As a direct consequence of improvements to our sourcing and buying we can lower our prices or improve quality in own-brand, which should mean we can sell more while generating the same margin.
This approach is not revolutionary: internally, our strategy is known as ‘Back to Basics’ because that’s what it is. The build-up of stock based on ASOS’ view of e-commerce as having an ‘infinite aisle’ was exacerbated by the perfect storm created by unpredictable demand and global supply chain disruption. While it’s a frustrating issue to solve, we have a clear plan to fix things and we are making great progress.
2. We improve profit per order by: i) improving our gross margin and ii) focusing on profitable orders
The new commercial model described above will, put simply, improve the realised selling price of our stock. This will have a positive impact on gross margin. We have also brought talent into the business to help us source product more efficiently. This will lower the cost of our sourcing and we are already seeing the benefits in our stock intake.
As well as this improvement in gross margin, we have taken action to improve our order profitability. The target we set for FY23 was to take profitability measures and lower costs to offset the c.£300m of inflation and other headwinds we expected in the year. A small proportion of these actions were one-off in nature, but the vast majority involved structural improvements to profitability, for example the removal of unprofitable non-strategic brands from the platform and the rebalancing of our shipping and returns proposition internationally where our investment failed to generate an adequate return. These changes have underpinned more than a 30%8 improvement in profit per order YTD compared to the same period last year. We have now delivered c.£200m of benefit YTD and are on-track to achieve our target of c.£300m by year-end, fully offsetting the headwinds in our cost base. The annualised benefit of these actions (gross of inflation) is c.£385m, with the c.£85m of incremental benefit in FY24 mostly realised in H1. These actions will structurally improve the profitability of the business to generate EBITDA in excess of cash interest, lease costs and capex.
3. We grow again by investing into customer acquisition and lifetime value
It is too early for us to outline the growth strategy for ASOS. We must first deliver on our target of turning our stock into cash and improving our profitability. However, the best way to create the conditions to grow is to offer again the best combination of fashion and excitement. This is precisely what we are doing. It is important to confirm our belief that as we restore ASOS to offering fashion-loving consumers the best product, with unique styling and an inspirational shopping experience, we can grow our customer base.
How will this impact our supply chain?
ASOS has developed strong relationships with its suppliers over the last two decades, based on the mutual benefit that those partnerships provide. Our assortment is sourced from over 1,000 suppliers across our own brands and the best fashion brands on the planet. Our own brands account for c.40% of our revenues and are available exclusively on the ASOS platform (with the exception of our joint venture with Nordstrom in the US). We complement this own-brand offering with a curated range of fashion-focused product from c.900 brand partners who are attracted to ASOS by our unique creative lens and deep understanding of a customer base that is often hard to reach. Our model is highly resilient, with no single partner brand accounting for more than 6% of our total revenues.
However, we have started to further improve the efficiency of our supply chain across both our own brands and partner brands. Across both channels, we are improving the shape of our buy – buying more of expected best-sellers (backing the winners) and reducing intake on the long-tail. In own brand, we are accelerating our speed to market through two key initiatives: i) the expansion of our Test and React model, which cut lead times from c.20 weeks to c.2 weeks in our recent trial; and ii) better leveraging relationships with our best suppliers to remove unnecessary administrative processes, which can increase speed and lower cost. It may also mean consolidating some of our own-brand suppliers or relocating some of our sourcing. On the partner brands side, we have already removed unprofitable, non-strategic brands from some or all territories and we are rolling out Partner Fulfils and ASOS Fulfilment Services models to offer increased width and / or depth in the assortment without the associated inventory risk.
The strength our of partnerships is best demonstrated by the fact that, despite the reduction in volume purchased by ASOS over the last six months and the ongoing consolidation of our supplier base, ASOS has not lost any relationship with a top 100 supplier.
At our H1 FY23, we reported trade and other payables of £837m. Around one third of this balance relates to stock payables, one third relating to non-stock payables and accruals, and the remainder relating to returns, deferred revenue and VAT payables. We typically pay our suppliers within 40-70 days depending on our agreed terms which typically involves a trade-off between cost and speed of payment (for example, many suppliers give discounts or rebates for faster payment). We have seen some tightening in the market over the last 6-12 months and prudently anticipate that this will continue. We estimate broadly 20% of our trade payables (by value) was previously covered by third party trade credit insurers, who we understand have now removed or cut cover. However, this is manageable, we continue to pay to terms and we expect any negative impact on cashflow to be modest.
What were the key considerations in our refinancing?
During the period, ASOS strengthened its balance sheet through a new long-term £275m financing facility alongside a cash placing of new ordinary shares which raised gross proceeds of c.£80m. As is typical of financing from traditional lenders, our previous financing facility was subject to Net Debt/EBITDA and Interest Cover covenants. The new asset-based financing facility provides simplicity under a single lender and is subject only to a minimum liquidity covenant (i.e. there are no profit-based covenants). It provides the stability of a structure in place to April 2026, with the flexibility to exit early or extend for an additional 12 months. These were key factors when determining the right financing structure to enable the business to focus solely on actions that will drive long-term value creation, free of any potential distortion from managing for short term maintenance-based covenants. The estimated annual cash interest cost of the new facilities is c.£30m.
Outlook
ASOS will retain its focus on profitable sales and its commitment to reducing inventory for the remainder of FY23. Expectations for H2 FY23 and full-year FY23 are unchanged from guidance issued in the H1 FY23 results announcement on 10 May 2023, as updated on 25 May to account for the cash costs of re-financing. As such, we are on track to build on the more than £400m of cash and undrawn facilities reported at H1 FY23 over the course of H2 FY23.
While the Company remains cautious on top-line outlook for the year ahead, the actions taken will continue to have a positive impact on profitability and cashflow. As such, the Company expects material cash generation in FY24 and therefore a further reduction in net debt.
José Antonio Ramos Calamonte, Chief Executive Officer, said:
“We continue to focus on making ASOS the best possible destination for our fashion-loving customers. At the same time, we are delivering on our plan to turn the business around: to right-size our stock; to generate cash; to reduce our net debt; and to structurally improve our profitability. I am confident in the direction we are going, we have restored profitability in the period and made good progress in clearing through our inventory to generate cash. We retain ample balance sheet flexibility and reiterate our expectations for improved profitability, cash generation and reduction in net debt in H2 FY23 and beyond.”
Notes
1 Constant currency is calculated to take account of hedged rate movements on hedged sales and spot rate movements on unhedged sales.
2 Adjusted revenue excludes non-underlying jobber income associated with the transition to the new Commercial Model of £6.1m in P3 FY23 and £8.2m in P3 FY23 YTD.
3 All numbers subject to rounding throughout this document. Revenue is stated at constant currency, adjusted for non-underlying items and excludes Russia from the P3 YTD FY22 comparative base period following the decision to suspend trade in Russia on 2 March 2022, unless otherwise stated. Any other adjusted measures exclude non-underlying items.
4 RoW and Group total sales for P3 FY22 and P3 FY22 YTD have been restated. This restatement relates to the removal of the £19.3m gain on RUB hedges, which was reported as revenue at P3 FY22 but subsequently reallocated to other income at year-end FY22.
5 Includes retail sales, wholesale and income from other services comprising delivery receipt payments, marketing services and commission on partner-fulfilled sales.
6 Profit per order based on variable contribution. YTD profit per order based off September 2022 – April 2023 data vs September 2021- April 2022.
7 Adjusted gross margin excludes the P3 FY23 gross profit impact of the stock write-off of £1.8m announced at FY22. Comparative gross margin for P3 FY22 is restated to 42.8% to remove the £19.3m gain on RUB hedges, which was reported within revenue at P3 FY22 but subsequently reallocated to other income at year-end FY22.
8 Active customers including those in Russia who shopped in the last 12 months as at 31 May 2023 total 24.1m (as at 31st May 2022: 26.5m); excluding Russia 24.1m (as at 31st May 2022: 25.6m).
9 Updated for an increase in the H2 FY23 cash cost of refinancing from c.£25m to c.£45m in the announcement of the refinancing of 25 May 2023.
10 Relates to the non-underlying stock write off in relation to the new commercial model announced at the FY22 results announcement.
Investor and Analyst conference call:
ASOS will be hosting a conference call for analysts and investors at 8.00am (UK time) on 15th June 2023. To access live please dial +44 20 3936 2999 / +44 800 358 1035, and use passcode: 303363
A recording of this webcast will be available on the ASOS Plc website later today: https://www.asosplc.com/investor-relations/
