ASOS Plc (ASC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the ASOS P1 Trading Update hosted by CEO, Nick Beighton; and CFO, Matt Dunn. My name is Joshua, and I'll be your conference coordinator for today's call. [Operator Instructions] I will now hand over to Nick Beighton. Nick, please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining our call for P1 trading update. That, of course, covers the 4 months to the 31st of December. We're aiming to keep it relatively short as it's still very early in the financial year. In terms of format, I'll start with an overview and an update on progress we're making against our key priorities, the ones we set out in October, before handing over to Matt. And then, of course, we'll take questions at the end. So let me start with a quick overview. This is an important period for ASOS. With our warehouse transition issues behind us, we're focused on restoring consistent execution and rebuilding customer momentum. And it's fair to say we're encouraged by the outcome. Revenue was up 20%, with good growth coming from all our territories. Within this, we had a record Black Friday, which surpassed our own expectations. The rest of the period played out broadly as we expected. Looking a little bit more detail on Black Friday performance. At peak, we were taking almost 2,000 orders per minute and our warehouses handled record order volumes. Our trading stance is focused on maximizing customer acquisition and the improvements we've been making in product choice, product availability and product presentation. This led to very strong customer engagement. This is also underpinned by robust operational performance across all our warehouses and technology. We hope you remember the priorities we laid out in October. These are aimed at further enhancing our capabilities and leveraging the investments we've been making. Four months in, I'm pleased to say we've already made good progress. To give you an idea of this, I want to pull out a couple of highlights for you. Our product newness is up 19% versus last year, reflecting our focus on increased product choice. This has really resonated well with our customers. Together with good stock availability, it helps support our performance. In terms of customer engagement, momentum was much improved. Traffic was strong with visits up 23%. We added 1.4 million active customers to our base in the first 4 months of the year. This came particularly at the younger demographic, importantly, our customer sweet spot. We've seen the strongest year-on-year growth in active customers aged under 25. The focus for the rest of the year is to build on this, retain the customers that we have and acquire more during the course of the year. As you'll be aware, one of our other priorities is to leverage the benefits of our investment. Against this, we're really pleased on how our automated Euro Hub stepped up to support record Black Friday volumes, with notable improvements in peak rate. We're also really pleased with the resilience of Atlanta and how well it handled peak for the first time. Looking at the remainder of the year, we always expected P1 to be our strongest period of growth, given our focus on customer acquisition. Therefore, while we're encouraged by this early performance, we haven't seen anything that will cause us to change the outlook for the rest of the year. I'm now going to hand over to Matt, who will give you a little bit more detail on the regional performance.

Thanks, Nick, and good morning, everybody. Starting with the U.K., we saw a strong performance with sales up 18%, which was slightly ahead of our expectations, supported by the actions we took to rebuild customer momentum and our trading starts around Black Friday. Particularly pleasing was the trajectory we saw in visits growth, stepped on again from the improvement we saw in the back half of last year, which is testament to how well the changes we are making are resonating with customers. Looking forward, given the scale we have now reached, we think it is likely that the rate of growth in our home market will begin to moderate at some point. Moving on to Europe. With our warehouse automation issues behind us and product availability correspondingly restored, we delivered a strong sales performance, up 21%, as the gap between visits and orders growth narrowed and conversion stepped back to be flat on the year. We now have 1.1 million more active customers in Europe than this time last year and are pleased with the progress we have made in reactivating customers. Turning to the U.S., we have made good progress with increasing the witness stock in our Atlanta warehouse, and we saw this translate to both healthy orders and [indiscernible], which resulted in sales increasing by 23%. We're still trading with a high proportion of markdown stock in the U.S. as we continue to clear through some of the older stock that built up through our warehouse transition phase. Finally, in the rest of the world, it's worth pointing out here that we didn't participate in Black Friday in our 2 main Rest of World territories last year, Russia and Australia, and that certainly supported our year-on-year growth this year. Notwithstanding that, our performance in the region was solid at plus 23% despite disruption in both Hong Kong and Australia, and active customer growth is pleasing. Turning now to gross margin. It was back 170 basis points with 2 key drivers, both of which we flagged in October at our full year results. The first of which was the increased U.S. duty as a result of fulfilling from our Atlanta warehouse. And the second was an investment in customer acquisition, including reactivating customers in the U.S. and EU. The investment here was slightly higher than we expected, which was due to a greater-than-expected uptake from our customers during Black Friday rather than any unplanned change to the level of promotion. Before I hand back to Nick, I wanted to touch on a couple of other points. As you'll be aware from following the sector, Black Friday is clearly becoming an increasingly important customer moment with traditional sale periods perhaps resonating less with customers than they once did. We are noticing a continued trend of pull forward into Black Friday, and therefore, I think it is important to look at the first half as a whole to ensure a complete picture of performance through the peak trading period. The other point I wanted to note was foreign exchange, given the movement in the strength of the pound since we last reported to you. As net sales as a foreign currency, FX has been a tailwind for us for the last couple of years. As most of you will remember, we hedge our major currencies on a net cash flow basis designated against sales. Therefore, for the P&L as a whole, any large moves in the pound against our key currencies, most notably the euro, will feed slow through as our hedges roll off. We do have a number of options to reduce this future exposure, but it's something we are cognizant as a medium-term headwind. More near term, we will see an impact from the emerging market currencies we don't hedge out far, most notably the Russian ruble. Our comment and outlook reflect the movements we have seen to date, but it's something to be mindful of, and we will give you a more detailed update on foreign exchange at our half year results. I'll now hand back to Nick to wrap up.

Thanks, Matt. I'd like to thank you all again for joining the call. Before I sign off and hand over to questions, our performance over the first 4 months certainly represents an encouraging start to the year. But we're very clear that there is much more work to be done both on our priorities we set out for our consistent long-term growth as well as working to build and retain the customers we have recently acquired. I look forward to updating you all again on our further progress at the half year results. I'd now like to hand over to questions, please. Operator?

[Operator Instructions] The first question on the line comes from David Holmes from Bank of America Merrill Lynch.

A couple on the gross margins. I guess first one is can you give us a sense of where that promotional activity was focused regionally? And then secondly, you've called out the 2 drivers, the promotional activity and the U.S. duties. Any sense of the magnitude of both those key drivers?

David, I'll answer that. So in terms of the overall 170 basis points, the U.S. duty impact was, by far, the most significant impact. So that was the principal driver. In terms of the investment, it was broad-based across all the regions. But as you can imagine, the EU and U.S. were probably within the mix slightly higher given our stated intent to reacquire customers in those territories.

The next question on the line comes from Simon Irwin from Crédit Suisse.

Congratulations on good trading period. Can you just talk about some individual categories in terms of how ASOS Design worked and how footwear, particularly sportswear went, given that they were clearly issues in the prior period?

Yes, of course. ASOS Design, both menswear and womenswear, grew much stronger than the top line performance, which we're really pleased about. Within that, ASOS 4505 performed extremely well and has continued to build on from the launch of 2 years ago. Our range have got better. Our fabrication has got better. Our stylings got better. Within that, footwear had a trickier start, but ended the year extremely well with new trends coming through both on ASOS Design and on branded footwear. So I'm pleased to say those categories have worked really well for us. On 2 other categories that you haven't mentioned specifically that I'd like to call out, ASOS Collusion that was launched a little over 18 months ago has continued to perform extremely well, resonating with younger consumers, and it's firmly in the top 10 brands in those weeks. And also, we've continued to build resonance and traction with our consumers on face and body. So that's just a quick tour around all the categories. Right now, we're looking forward to a stronger bridal wear season, some of our bridal wear ranges are extremely compelling in terms of fashion, styling and price points. And we've had tens of thousands of brides choose to wear ASOS down the aisle for the first time, which is something that we are very pleased about.

Great. So the conclusion from that is that in terms of margin mix, that overall mix should be quite positive.

Well, you know ASOS Design has a stronger margin than brands. But equally, face and body is a lower margin, the incremental items to the basket. So.

The next question comes from Michelle Wilson from Berenberg.

So first of all, just on the 1.4 million active customer adds. Could you give us a bit of a background on what's driving that, whether it's retention rates or predominantly coming from new customers and if ever there's any change in marketing strategy? Second one, on the U.K. growth, you mentioned that you're expecting U.K. growth to moderate. Have you actually seen a slowdown in new customer acquisition over P1 that caused you to think that's happening soon? And then thirdly, just after that very strong Q1 performance, is there any issue around stock availability heading into the sale period in Q2 that we should be aware of?

Okay. I'll start off with the first couple of those. The 1.4 million customers we acquired during the first 4 months, we're very happy with. You all know that we acquired 1.9 million for the whole of this year. I was most pleased about our acquisition in the younger demographic. That was up substantially greater than the 15% for the entire group. Now one of the things we have done with that is we've sharpened our ranges, we've sharpened our newness, we've sharpened our presentation and we also pulled forward an awful lot of compelling promotions targeted at that particular demographic. So those are the areas where we've seen the most growth. And actually, it's been across all territories, not just U.K. In terms of the comment on the U.K. growth rate, this quarter has, again, surprised us on how strong -- sorry, some customers, I forgot to mention, we've seen both strong new customer acquisition and also strong reactivation and therefore, a lowering of the churn rate. So that's a very pleasing trend across all dynamics. In terms of U.K. growth, we were surprised about how robust it was. It was ahead of our internal expectations in the U.K. At some point, I've been on record before, that growth rate has to moderate given the size of the U.K. business, the size of the opportunity and math getting in the way. In terms of start, Matt, do you want to pick up anything on that?

Yes. So I mean whilst Black Friday was slightly ahead of our expectations, in terms of the flexibility of our stock management, there's nothing I'm particularly worried about from a stock availability perspective going to Q2. Clearly, the balances I flagged on -- in my kind of remarks between Black Friday and the January, February period and particularly the clearance element of that, we'll have to see how it shapes out, but stock shouldn't be a problem in that context.

The next question on the line is from Adam Cochrane from Citi.

A question I've got is looking at the -- you're talking previously about the number of customers that you may have to reactivate in the U.S. or Europe because maybe they had a disappointing experience before. In terms of versus how you expected the discounts or vouchers, however you got them back in, has that gone to plan? And secondly, if you've reactivated those customers, have you seen or had enough time to track how their purchasing behavior? Has it gone back to where it was before the disruption? Or have they -- if they just sort of don't say or bought something because of the promotional activity?

I think I know where you're going. The question there is how are the newly acquired customers translated their behavior since the acquisition? Well, to be fair, it's still early days to determine what the ongoing quality of the database has been through that acquisition. But what I do know from experience is acquiring them in the sweet spot and seeing an underlying increase improvement in Premier membership, gives us a good and early indication of the quality of those data -- of that customer database. But we will need a lot longer to see how their behaviors translate through the rest of the year. Does that help? And in terms of the....

[indiscernible] related ones.

Well, the reactivation period most definitely is around -- the biggest one in the year is November. And so that's 6 weeks past, so we just need a bit more time to see how that reactivation continues. In terms of activating customers in Europe and U.S., we're very happy with how those were reactivated and very happy with the results in growth that came from those territories.

In terms of other than the sort of sales metrics with the amount of feedback you get via other channels, have the -- what's the customer feedback been in terms of, over this period, if you had very positive social media or other? It's a feedback from them now that you're back to normal, let's call it.

So there's a couple of measures that Matt and I look at very regularly to assess those things. One is our Net Promoter Score. And the other 2 are Trustpilot scores and CSAT scores. Trustpilot, over the last 6 months, has improved its rating substantially as our CSAT. Now those are quite early indicators of customer experience. NPS scores have leveled out, and we're looking for an improvement in the back end of this year.

The next question comes from Simon Bowler from Numis.

A couple of questions for myself. First of all, just when you talk about kind of customer acquisition, can you perhaps elaborate on how much kind of went into the marketing? So the operating cost side of things. I apologize about the background clapping, that was not about when I asked my question. And then the second piece is just regards to the gross margin because there's a bit of volatility in kind of first quarter, second quarter as reported last year, I was just wondering if you can give us a sense of what the clean base was for the 4-month period, so we can put this month -- this year's kind of performance into context.

All right, Simon. I think Matt could answer both of those.

Yes. So I mean in terms of marketing costs, clearly, it's not a number we've given, and we'll give a full view of the P&L in a couple of months. I think if we were -- if you've seen anything significant change in the trajectory, we would have called out today, so you can assume that the trajectory is more -- is relatively normal. We've continued to invest in line with the growth we've seen broadly. In terms of gross margin, again, I'm not going to give numbers we haven't given out before. So let's clarify that at the half year. I think it would be easy to show you that full period at the half year, and you'll get better read of the trend then.

Okay. Is it possible to ask the second question in a different way in terms of should we expect kind of any material change in that kind of gross margin shape across the final 2 months of the year? Or should I just shut up and wait for interims?

No, no, no. I think I can -- that I can answer, Simon. So as I've probably -- so I think, clearly, as we flagged, the biggest driver of the gross margin movement has been the investment in the duty and as we move into a U.S. warehouse. You should expect that to continue through the vast majority of the January, February period because we only ramped up the warehouse at the end of February. So in that sense, I wouldn't expect a significant shift in trend. The other moving parts will obviously depend on our trading from here to there, but I'm not expecting any material shifts in the rest of the first half. As we move into the second half, with the U.S. duty in the base, then I would expect to start to see a shift in trend as we move into the second half.

The next question on the line comes from Tushar Jain from Goldman Sachs.

Two questions from my side. First one, basket size. If you can give us a color how basket size trended, especially in Europe and U.S. given better choice and product availability? And second question on U.S., I mean gross margins are declining, but can you confirm if the distribution cost is broadly offsetting that decline in the gross margin? Is it still the case?

So let me deal with both of those, Tushar, and I'll deal with the gross margin one first. So absolutely, as we indicated at the full year, we are seeing that duty cost largely offset by the distribution savings or the delivery savings that we're seeing. So absolutely, from a total profitability point of view, the impact will be much less significant than what -- than that you're seeing in gross profit. Again, I'm not going to give you a specific ABV number. And I think the trends are very much as we outlined it would be at the full year. Therefore, as we start to get into better levels of stock availability, we are starting to see that result in the right trend from an ABV perspective. We'll obviously give details at half year. But I guess, we're not seeing anything that we do not expect to see as we -- that we flagged at the full year.

The next question on the line comes from John Stevenson from Peel Hunt.

A couple of questions for me, please. Can you comment on the breadth of the branded U.S. offer you had going into peak versus where you might have hoped you would have been 6 to 12 months ago? And maybe comment on how the U.S. range is going to build over the next, let's say, 12 months? Also, can you talk on current thinking around EU pricing levels. I think you previously stated that you wanted to trade peak before you took a decision on whether there's need for sort of further underlying investment and price in the EU territory. And then maybe, finally, obviously, various approaches to promo and recruitment going into peak, how is that sort of shaping your thoughts for how you can operate in the year ahead?

Okay. Branded wear first of all -- or U.S., first of all. Some of the strongest growth we've seen in the U.S. has pleasingly come from the ASOS Design, and that's something that's very satisfying for us and one that we are pleased about. The branded wear hit the target we were looking for pre-October, which was evidenced in the overall performance. And there's still a lot more brands that we think we can build into the U.S. offer, and we're working hard on that. But we hit our target, we hit our plan, but the thing I'm most pleased about in the U.S. has been the ASOS Design growth, which is stronger than the overall company growth we've reported. In terms of EU pricing, you're absolutely right. I'm not going to give you a clue on what we're going to do right now, apart from we are looking at it now and deciding the level of investment we will or will not make. So that's something we'll give you more clarity on when we've made that call. In terms of promo mechanics, during September, October and November, we experimented with very different ways of attracting customers. And all of those were very successful, and we're very pleased with the results we have. Now what you've got to do with all of these is keep it fresh, keep it relevant, keep it timely. But all of the promos only work when it's anchored with great products, great presentation and great newness and of course, decent availability. So we'll continue to experiment all of those. We'll have a good look at -- a good think about that one now, and we'll probably shape a different trading plan for the rest of the year when we've got to it.

Okay. All right. So more at the interims, I guess.

Sorry, John, say again, mate.

Sorry, I'm saying there's a bit more detail at the interim then.

Yes, indeed.

The next question on the line comes from an Anne Critchlow from SG.

Two questions from me, please. So thinking about the comments you made on FX, could you tell us what your operating cost split is by the main currencies now having opened the Atlanta warehouse? And then the second question is on the sales run rate in the U.K. underlying. Was there a huge spike around Black Friday? And if you strip Black Friday out, what would the run rate has been compared to that 80%?

Matt's going to answer both of those for you, Anne.

Let me deal with FX. So I mean, I won't give you exact numbers, Anne. But just in terms of our operating cost split, our warehousing costs are now broadly aligned with our sales performance in terms of the splits, in the sense -- obviously, with the European warehouse for our Euro Hub territories and the U.S. warehouse for our U.S. territories. I guess we're -- if there's any degree of misalignment at all, it will obviously be the advantage services, the whole of Rest of World, particularly those emerging market territory. Our -- the rest of our cost base, delivery costs are largely in local currency where we have them. It will depend on the lanes, et cetera. And then obviously, our fixed cost base obviously is predominantly in the U.K. So it kind of gives you a feel we're weighted towards the U.K. But we're -- as time moves on, obviously, more and more of our costs are being put into local currency as we kind of stand up those local operations. And then from a sales run rate perspective, we saw good momentum in the U.K. throughout the whole peak period. And in fact, there were a number of events, for example, that we ran in the U.K. for the first time. So we really put Singles Day, which is obviously a phenomenon. It's big in Asia. But as it's been less in the U.K., we did do something in the U.K. So yes, definitely, Black Friday was probably the greatest growth rate, but we saw good underlying momentum throughout the period.

The next question on the line is from [ Emily Coullage ] from Redburn.

So on gross margin, you've obviously pulled out some of the drags to the U.S. duty and the investment in the customer acquisition. But could you perhaps talk about and hopefully quantify some of the positive impacts? So we've had about own label growth, but also any discounts you've got from suppliers?

Yes. Look, I can do -- I'm afraid it's going to be a short answer though. So we'll obviously go into more detail. I'm not going to try and break out all the moving parts at this point. I think as I flagged earlier, I think it's much better to take a view of our performance across the whole of H1 when we can break out the component parts in more detail.

The next question is from Rebecca McClellan from Santander.

Just a couple of questions from me, please. In terms of these FX headwinds, which are potentially sort of emerging, is there any chance of adjusting pricing in some of your emerging markets in order to sort of compensate for this? And secondly, you mentioned about the U.S. markdown stock. Where are you at the close of P1 or into P2?

So just -- I mean just on FX, absolutely, we -- pricing is one of the elements of mitigation that we have. And you will see we're not unique in the fact that, particularly in emerging markets, obviously, we -- pricing is relatively dynamic to reflect the way that those currencies move around. So again, we'll give more color at the half year, but that's absolutely one of those things that we -- and in fact, we have invested in price in the last few years, as we have seen the pound weakened against some of those currencies. So if you look back, particularly in 2017, you will have seen that impact our results. So you can expect us to be able to address that in some cases, but there are other mitigation opportunities as well. From a U.S. perspective, our markdown mix is improving all the time. But in terms of the relative mix of our markdown product, it's still heavier in the U.S. warehouse than it would be in our other 2 warehouses. Clearly, January, February is a key period for clearance stock. So we're working on that right now. And therefore, as we exit H1, I would expect us to be in a relatively good position, but we'll obviously have to wait and see how we trade across the next few weeks.

The next question is from Olivia Townsend from UBS.

I just have 2 questions. So firstly, do you expect to have a kind of concerted effort to recruit younger customers throughout the year? And then secondly, a follow-up to that. Do you see any differences in how younger customers tend to shop versus all the customers or just the full cohort? Do you see them shopping more frequently? Just trying to understand if there would be an impact on, roughly, economics.

Okay. Yes, we will continue to focus on customer acquisition and retention. Yes, we will continue to focus on our sweet spot of 20-somethings, too. We're building ranges that appeal to that whole demographic, but having a lot of pickup with the younger demographic, as I said earlier, and we'll continue to do more of that. It's difficult to say, a younger customer does this and old customer does that. But the clearest trend is, actually, a younger customer tend to be more frequent engagement, tends to be more mobile-native, tends to be more engaged through Instagram. But those are really broad brush assumptions. But there's not a lot more help I can give you on that, Olivia. But I think you're probably there already.

The final question for today is a follow-up from Simon Bowler.

Just one quick follow-up, if that's okay. I was wondering if you can help us think about the kind of first half, second half profit shape across the balance of this year.

Yes. Again, let's finish the first half before we start commenting. But I guess, what we would expect, Simon, is a shift towards that more normal first half, second half split than we saw last year. So that's the kind of where I would expect it to move towards, but let's see how the rest of the first half trade before we can be more explicit on that.

All right. I think you've got the closing curtain there, Simon. So thank you for that. Thanks again, everyone, for joining the call. I'll just reiterate what I said earlier. Our performance for the first 4 months is an encouraging start to the year. Clearly, there's lots more for us to do. We'll continue to work on our priorities, and we'll set out more detail where appropriate when we see the interims in April. Have a good day, everyone, and thanks again for joining the call.

Ladies and gentlemen, this does now conclude today's call. Thank you for joining, and have a wonderful day. If you've missed any part of today's call or would like to hear it again, a replay will be ready shortly.