- No further profit warning from fast-fashion retailer
- Inventory and debt down again
- More optimism for fiscal 2025 though losses could persist
- Lower active customer numbers and site visits show there is still much to be done
“Lower debt means less risk and less risk can mean a higher share price, all other things being equal, but the muted response to ASOS’ full-year results suggests investors think there is much work still to be done at the fast-fashion retailer, even as excess inventory is whittled away, cash released and borrowings cut,” says AJ Bell investment director Russ Mould. “ASOS shares trade at their lowest mark since 2009 thanks to wider worries about competition and consumer confidence, as well as the retailer’s own specific challenges and debate over the role of fast fashion in wardrobes and wider society, as some shoppers switch to Vinted, Depop and eBay to consume less and do so in a more curated way.
Source: LSEG Datastream data
“After 2023’s profit warnings and January 2024’s lukewarm trading update, investors can at least draw some comfort from the absence of any further trading alert.
“At £80 million, ASOS’ preferred profit measure of adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) slightly exceeded management’s guided range of £20 million to £75 million. Chief executive José Antonio Ramos Calamonte has also pointed to the prospect of further improvement in the new financial year, to a range of £130 million to £150 million. That supports the current analysts’ consensus forecast of £149 million.
“Better still, ASOS can point to progress in reducing inventory. At £520 million, this is now below the company’s target of £600 million and way down from the £1 billion-plus mark of two years ago, although the need for a further £100 million write-down here suggests that underlying stock turn could have been better.
Source: Company accounts. Financial year to August.
“Inventory days are down significantly and lower stock levels on the balance sheet should have two major benefits. First, that should mean less discounting, higher margins and thus improved profits. Second, it should boost cash flow and reduce borrowing.
“ASOS has further steadied its finances with a debt refinancing and the sale of a 75% stake in the Topshop and Topman brands to its own leading shareholder Heartland. The £135 million proceeds here should further buttress the balance sheet in the current financial year.
Source: Company accounts. Financial year to August.
“That would represent another major step forward for Mr Calamonte and the board, which includes 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.
“Management’s focus points for fiscal 2025 remain profit and cash flow and analysts’ forecasts for sales growth in the coming year range from a fall of 9% to growth of 6%.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to August.
“This uncertain picture may well reflect how active customers, shipped orders and customer visits fell by 16%, 15% and 20% respectively in the year to September 2024.
“Those metrics 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 lower, more curated and vintage-oriented consumption via Vinted and Depop) 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.
“It must also be remembered that ASOS’ focus on adjusted EBITDA cannot obscure how analysts still think the firm will make losses on a statutory basis in 2025 and possibly even 2026.”
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to August.
