Why fashion retailer ASOS’ shares rallied 16% despite disappointing festive sales

– A 3% drop in revenue in the four months to December

・Full-year guidance remains unchanged

– ‘Significant’ second half profitability and cash improvement expected

The unloved online fast fashion retailer ASOS (ASC) Topshop brand owners saw further declines in sales in the four months leading up to December 2022, including Christmas, as demand from UK customers dropped significantly.

But the FTSE 250 retailer’s shares rose 16% to 680p in the absence of another earnings warning, with new CEO José Antonio Ramos Calamonte taking decisive action to put the business in order. indicates that

After losses in the first half, ASOS continues to expect “significantly improved” profitability and cash generation in the second half of this year through August 2023 and beyond.

There was also relief from ASOS reiterating its full year cash outflow guidance of nil to £100m and saying it expects a ‘substantial’ improvement in gross margin in the second half of the year.

Are the days of growing up gone?

ASOS’s days of rapid growth are gone as the fashion retailer faces stiff competition from bricks-and-mortar rivals and grapples with inflationary pressure on customers, normalization of return rates and rising costs. It seems that.

Group-wide sales fell 3% to £1.34 billion in the four months to New Year’s Eve as the fashion-loving 20-something website continued to grapple with volatile trading conditions.

UK sales fell 8% due to weak consumer sentiment and turmoil in the delivery market in December.

Elsewhere, sales in the EU increased by 6%, supported by higher prices and strong customer growth in the Netherlands and Ireland, despite lower sales in the US and Rest of World.

ASOS also reported a 10-basis point drop in gross margin to 42.9% as it needed to lower prices to clear bloated inventories.

Guidance has not changed

ASOS expects a loss in the first half of 2023. This is due to the ‘normal profit stage’, inflationary headwinds and high product return rates. These headwinds are expected to persist into the second half of the year, but should be more than offset by Calamonte’s ‘Driving Change’ agenda and accelerated benefits from reduced airfreight use.

Caramonte said ASOS is “making the necessary strategic and operational changes and prioritizing top-line growth to make it more relevant with a disciplined approach to capital allocation and return on investment (ROI).” We are shifting our focus to building a highly competitive fashion business.

“At the same time, we are working to strengthen our credibility as a leading destination for our fashion-loving customers.”

expert opinion

Shore Capital said:next (NXT) Last week’s trade update appears to have seen online return to the trendline, confirming our view that it will continue to increase its penetration over physical channels, albeit at a moderate pace.

“However, we see ASOS as a vulnerable player in this situation, noting that full-year 2023 profit before tax (forecast) is 15% below consensus (£26m).”

AJ Bell investment director Russ Mold explained that Calamonte “doesn’t want to go back to the old days when sales growth was the main focus.” His current focus is on profitable growth and generating good returns on the money invested in the business.

“Having a plan and vision is good, but achieving it is another matter. ASOS still has excess inventory and needs to bring down prices to clear these inventories. Sales continue to decline in most geographic locations.

“Market reaction suggests that ASOS is now a pure recovery story, with confidence placed in its new boss to achieve positive results, with investors optimistic about recent weak sales and Stocks have surged as margin metrics don’t appear to be plagued.In the news.But the market won’t wait too long to see the fruits of ASOS’s efforts on its turnaround efforts. .”

Disclaimer: AJ Bell, a financial services company mentioned in this article, owns Shares magazine. The article’s author (James Crux) and article editor (Tom Sieber) own his AJ Bell shares.

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Publication Date: January 12, 2023

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