“Youthere is a lag between operational change and visible results,” online fashion retailer Asos said in its semi-annual report, putting an upbeat spin on half-yearly figures that were notoriously awful.
While the new chief executive talks management streamline and scale, an adjusted pre-tax loss of £87.4m was several degrees worse than the city had expected. The unadjusted version, which included a £129m share writedown and various other hits, was a £291m loss, which is accumulating over the space of six months.
Shares plunged 23%, wiping out the last few hits of a New Year’s rally that had been inspired by the idea that José Antonio Ramos Calamonte could make some quick fixes to a business that spent too many years chasing sales growth. especially abroad, without ever putting a solid operating model in place. The surge of additional demand during the Covid lockdowns masked the failures… until it didn’t.
Calamonte seems like a more hands-on operator than his predecessors, which is presumably why he got the job. And after half a lap on track, he’s sticking to his target of £300m of cost savings this year. A strategy of fewer discounts and more focus on selling full-priced items also sounds entirely sensible.
The challenge, however, lies in believing that a return to what Calamonte called “sustainable profit” can come as soon as the second half of his year. One question for the City is whether the “drive change” agenda is radical enough. Another is how the novel view of falling sales (revenues fell 8% in the half, despite inflation) will affect profit margins in the medium term.
In the midst of it all, one glimpses how deep some problems run. The mini-disclosure in the earnings statement was that “a small number of customers” are having “a disproportionately negative impact on Asos’ profitability”, to the tune of more than £100m.
How is that? Well, it seems these customers buy loads of discounted stock with buy-now-pay-later credit, try on the clothes, then return most of it, creating hassle and expense for Asos. The loss per order in this category is around £6. Since the “small number” represents 6% of a 25 million customer base, that’s 1.5 million people, that feels more like a big deal. Using “a more personalized approach to encourage good behaviors,” whatever that means, also seems like a timid remedy.
Meanwhile, a bit of the fizz has evaporated from the entire online fashion scene as stores have reopened. And one suspects that the arrival of newer online players such as Chinese firm Shein and thrift marketplaces Depop and Vinted are becoming more than minor irritants.
Calamonte’s latest problem is balance. For one thing, Asos secured an extension to its credit line this month. On the other hand, net debt was £432m at the end of February and, even with expected cash inflows in the second half, the company’s prediction is for a minimum net outflow of £100m over the next few years. 12 months. “With free cash flow expectations lowering, we still see the risk that, in a plausible downside scenario, the group will need to raise more cash,” the Liberum analysts said.
One can see why hopeful punters briefly settled on Asos as a rebound candidate. This is still a business with £4bn in annual revenue – that’s been around two decades; and the share price, now just 487 pence, was £55 just two years ago. But one can also understand why consensus thinking has been reversed. Calamonte is attempting a major overhaul in unfavorable market conditions. Beware of the delay. Fast fashion, slow recovery, that’s the way to bet.