ASOS Plc (ASC) Earnings Call Transcript & Summary

Good morning, everybody. And thank you for joining the ASOS webcast this morning, where we'll deal with the first half performance and some of the financing and COVID-19 things we've been experiencing. Given the backdrop, we'll keep the time spent on the first half results as short as possible to allow us to spend longer time discussing the impacts of COVID-19 in our business and along with the actions that we are taking. Once we've gone through the slides, Matt and I will be very happy to take any questions. We'll explain the procedure as we get to that later. So let me start with a quick overview of the first half performance. As I said at P1 trading update, this was an important period for ASOS. We've been focused on restoring consistent execution, rebuilding customer momentum. And as you know, we got off to a great start over Black Friday, and that's carried through momentum into January and February. We finished the half with P2 up with sales growth of up 24%. For the half as a whole, sales growth was up 21%, reflecting strong performance in all regions as you can see. Matt will go through in more detail on those regions and that performance shortly. In terms of productivity, it was also a strong half, reflective of the strong trading and sales growth and much better-than-expected progress in removing nonstrategic costs. Our EBITDA margin was restored ahead of FY -- or HY '18 levels, and we delivered a PBT of just over GBP 30 million. This is actually the highest PBT we've ever delivered in the first half. On customer momentum, this was much improved. We added 2 million customers to our active database in the half, taking us to 22.3 million, which is an increase of 16% year-on-year. I'd like to turn briefly now to COVID-19. We'll take you through some more detailed scenarios later on in the slide deck, but summarizing the impact and how we're responding in the most -- right here. In most recent weeks, we have seen significant impact on demand. For the last 3 weeks, sales have declined between 20% and 25% year-on-year. All our warehouses are operational, albeit at reduced capacity as we've reflected strict social distancing measures in all centers. We have responded swiftly and decisively, and we're managing the business through this rapidly changing and uncertain environment. I just have to say, I've been very impressed with the performance of the exec team and the flexibility of our ASOS team who've adapted to the challenges we are facing. And we've managed to continue to keep the business trading while still serving our customers. So thank you all for that. We have taken swift and decisive actions also to protect our liquidity. Matt will talk through more detail on that later. Where we are now, we remain comfortable. We have sufficient liquidity in place to manage a reasonable expectation of how this crisis could pan out. But we've also put together a further package of financing, both in terms of extra precautionary headroom in our RCF of around GBP 80 million to secure -- and we secured a further equity capital raise that will ensure we put the organization in a place where it can emerge through the crisis in a much stronger position. I'd now like to hand over to Matt, who will talk you through some of the financials in more detail. Thank you.

Thanks, Nick, good morning, everyone. Let me start first with our key financial metrics. Total sales grew by 21%, reflecting a better-than-anticipated performance through the clearance period and supported by good growth in the active customer base. The customers we acquired over the peak period also showed promising trends in terms of their behavior, although the window to fully evaluate this still remains too short. Gross margin declined 170 basis points, in line with expectations, primarily driven by increased U.S. freight and duty, and I will touch on that in more detail shortly. EBITDA margin was up 210 basis points year-on-year on a like-for-like basis and at 4.9% recovered to comfortably ahead of H1 levels in 2018 and demonstrates the improving underlying cash generation in the business. PBT was materially higher year-on-year, stepping up from GBP 4 million to GBP 30 million. This reflected the strong sales performance alongside better-than-anticipated progress on the removal of nonstrategic costs, in addition to improving efficiency in our warehouses, which drove a step back in our transition costs. Net debt at period end was GBP 163 million, reflecting us moving through the seasonal peak of our investment in working capital. Finally, on this slide, CapEx of GBP 71 million tracked in line with our full year guidance of GBP 150 million, which we gave back in October. Given the current environment, that will reduce to GBP 120 million, reflecting the deferral of the TGR program and some other smaller projects. Turning to our regional performance. We recorded a strong performance across all segments with healthy growth in nearly all key metrics, as you can see from the table. We also saw traffic growth strengthen throughout the period, a real indication of our underlying momentum. In the U.K., first half performance surpassed our expectations, particularly through the traditional clearance period in January and February. Traffic was consistently strong, up 18% in the half, and our active customer base was up 10% year-on-year, driven by both new customer acquisition and reactivations. The U.K. responded well to the improvements we made in product presentation, customer engagement and our dynamic trading stance. Performance through the half was consistent, but we are particularly pleased with the results over Black Friday, where we gained market share. Overall, this performance translated into good growth in frequency, up 6%, and ABV also up 6% as an increase in items per basket was also aided by a small overall increase in ASP. Moving on to Europe. Our performance here was much improved this half, up 21% as last year's warehouse transition and stock availability issues will resolve ahead of the peak period. Traffic was particularly strong, up 26%, reflecting the actions we took to improve customer momentum with the reinvigoration of our promotional calendar and social engagement activity. Conversion, which stepped back slightly, reflected a mix towards -- a mixture towards mobile web, which has a higher mix of new visitors with lower initial conversion rates. France and Germany responded particularly well to our trading stance around Black Friday, showing great growth year-on-year following a disappointed performance through the peak period last year. We made investment in the half into better availability in dresses, which was particularly supportive of performance in Germany, which over indexes in that category. Sales growth stepped up to 25% in the U.S. We made good progress with our product width in the region and the focus there continues. We're making particularly good progress on extending the width of our face and body offering, and we'll continue to make efforts in this area. Sneaker brands performed particularly well on our U.S. sites in the half, reflecting our expansion of branded products here. Turning finally to Rest of World. Retail sales grew by 20%, supported by a stronger year-on-year trading stance, particularly over Black Friday, following the exclusion of some territories in the prior year. We continue to see really strong growth in the MENA region, supported by great growth in traffic and a rapidly increasing active customer base. Russia continued to grow solidly during the period. And in Australia, we saw good growth despite the bushfires. We did see softer trading in APAC, primarily driven by disruption associated with the unrest in Hong Kong. Turning now to the shape of our P&L. Gross margin was back 170 basis points in the half, driven mainly by the increased freight and duty costs associated with the fulfillment of our U.S. warehouse, as I previously mentioned. However, this element is more than offset by the reduction in distribution costs, reflecting the local fulfillment capability we now have. The other drivers of gross margin were some planned incremental investment in customer acquisition, an adverse foreign exchange impact, and these were both partially offset by an improvement in buying margin. Warehouse costs reduced 90 basis points year-on-year, of which 40 basis points is attributable to the move to IFRS 16, as you can see on the slide. Beyond that, we saw increasing efficiency from our Euro Hub operation driven by automation, although this was offset to some extent by the cost drag of our U.S. warehouse, given this is a manual facility. Reduction of 60 basis points in marketing costs reflects the removal of nonworking marketing spend and greater efficiencies in our direct marketing spend. We have in-sourced a large portion of our PPC activity, increased the use of smart bidding and implemented a more structured approach to testing marketing activity. The main driver of improvement within other costs was leverage on our payroll costs, which decreased 1% year-on-year despite restructuring costs of GBP 5.8 million. This reflects continuing work to ensure our people are deployed in the most efficient structure, removing duplication where possible and removing inefficiency across the business. The transition to IFRS 16 also impacted other costs, primarily reflective of our rental obligations. Finally, depreciation stepped up 110 basis points to 3.6% of sales on an IFRS 16 basis as expected. Turning now to cash flow and net debt. We finished the half with net debt of GBP 163.6 million, reflecting a cash outflow of around GBP 73 million. This was in line with our typical working capital cycle, reflecting our investment in stock for the spring/summer trade. The cash flow reflected a much improved EBITDA of GBP 92 million, which supported our cash flow profile and represents an increase of GBP 55 million in comparison to H1 last year. CapEx in the period of circa GBP 70 million include the continued investment into our TGR program. We made solid progress within the half, however, as I've previously mentioned, we have taken the decision to postpone implementation until FY '21 given the current operating environment. Beyond this, we invested into some smaller automation projects in Euro Hub and will continue to support -- which will continue to support improving efficiency at this site. We have also delivered a number of smaller tech and supply chain projects, as we focus on -- sorry, we've also deferred a number of small tech and supply chain projects as we focus on protecting liquidity within the business, and we now expect CapEx to land at around GBP 120 million versus the GBP 150 million we previously guided. I'll now hand back to Nick to take you through our operational performance.

Thank you, Matt. And now we'll turn to the 6 priorities, if you remember, we outlined at the start of this year. These priorities were helping us deliver on the opportunity we have and moving us towards building ASOS into one of the few truly global leaders in retail. I'm pleased to say we've made great progress here. And I'm going to just take the time to go through each one in a bit more detail. So starting with organizational capability, strength in the depth and breadth of our senior management is a key priority for us. And we recognize the need to add additional capability and experience around the leadership table. In terms of progress, Robert Birge joined us early December as our Chief Growth Officer. He has end-to-end ownership for the customer journey from marketing to digital marketing, to brand marketing and then to customer experience. In March, we announced the appointment of Jo Butler as Chief People Officer, who will be key in supporting us with the transformation of the organizational design of the business and also our culture. This year -- and also later this year, Patrik Silén will join us as Chief Strategy Officer. He will bring a wealth of experience from his time at McKinsey. That just leaves us with the Chief Commercial Officer to fill. Turning to nonstrategic costs. As I said on the top of the call, we've made better-than-expected progress here removing nonstrategic costs. In the first half, we're able to increase our EBIT margin by some 190 basis points through a focus in this area. A notable driver of this has been the efficiency of our marketing spend, and Matt touched on this. Other initiatives include more focused investment into improving basket metrics, ensuring we're investing in customer proposition in line with our key strategic priorities, driving the right return from those investments; and finally, targeted cost savings through returns, clearance, markdown and customer care areas. Let me move on to product choice. This is all about making sure we have great products, increasing our choice, competitively priced, great availability and solid units. We've made great strides in all of these areas. We've added over 100 new brands in the half through our platform, including high street fashion brands such as Topshop and Berghaus. In addition to that, our own brands such as -- continue to grow well. Collusion has been a standout winner, with sales up 48% again over the year. I talked about the amazing start these brands had previously and I'm delighted it's continuing to deliver. ASOS 4505 ran another great season with amazing sellout reactions, particularly in the skiwear range, which we sold over 80,000 units. We backed this increased choice up with great availability, which was ahead of last year, with notable improvements in the U.S. and in Europe. And more importantly, we backed this up -- continue to back this up with consistent newness. New products in the first half were up 13%. To highlight how important this is to us, the New In page, many of them I'm sure you know, is the most viewed page in our ecosystem. And we make sure we keep pace of this by refreshing that daily. Moving to social media and presentation. Inspirational product presented beautifully and high social media engagement remain key to the ASOS customer appeal. Our product presentation is designed to be inspiring and engaging and for our fashion-loving 20-something customer. That's what it's always -- what we've always excelled that. We lost our way admittedly a little last year, but we've made great progress in restoring this to the heart of everything we do, being crystal clear on the role we play for our customers and how we approach it consistently across our organization. ASOS should feel like your cool best friend. We're here to guide, inspire and explore the edges of what they would normally wear and just feel like someone saying, "Just try this." Our presentation, it should -- and product is fresh, inspiring, never contrived and should always be inclusive. We've had great successes over the half with product collaborations and style edits. Highlights from which were another second collection from Ovie, the basketball and Love Island star, Delilah Bell and Emily Shak. We've seen great engagement on the associated content with these influences and the associated product that they endorsed has sold really well, seeing great sales uplifts. During the half, we celebrated surpassing 10 million followers on Instagram. We've also seen some great engagement from our customers through the crisis, reflecting how ASOS has fit into their lives beyond just being a transactional platform for them. Let me give you an example. We've pivoted our content and launched #AtHomeWithASOS. We're running live events, including fitness sessions, beauty regimes, DJ sets, content -- with content creators, insiders, influencers and the ASOS team. We've had over 3.3 million video views across Instagram grid and IGTV from the 12th to the 25th of March, representing a growth of over 100% in previous weeks. So our content engagements actually got stronger over the pandemic period, which is fantastic news. Moving on to customer acquisition. We've clearly been focused on rebuilding our customer momentum in the first half. We were really pleased with the momentum we've built here. And through the key customer acquisition period, we added a huge 2 million active customers to our active base in the last 6 months. This is already a loyal base, which sets us up really well for the remainder of the year and beyond. We've continued to evolve our promo stance with a focus on tapping into key customer moments using mechanics that resonate with them. Then this just isn't about indiscriminate discounting. It's about trading in a way that keeps ASOS on the front of customers' minds. It drives frequency. It's driving engagement in a way that resonates with customers and their evolving perception of value. Our focus here is to do much more a retaining and driving increasing frequency from our customers. Let me move on to the 6 priorities, leveraging the benefits of our transformation investments. You'll see some of these from Matt's slides already. The automation in the Euro Hub is driving cost benefits, and you can see here the scale of progress we've made. The 2 charts on the left-hand side show the pick and pack efficiency of both Barnsley and Euro Hub. From a packing perspective, over the course of the first half, the Euro Hub has got to the same levels of efficiency as Barnsley, and we've made meaningful progress on picking as well with further improvements to come. Our U.S. Hub has also made meaningful improvements in its operational efficiency, albeit at a more manual operation compared to Europe. Investment in these facilities is not only driving cost efficiency, but it's allowing us to make real improvements to our customer proposition. We've rolled out next-day delivery to 90% of our U.S. customers. We've improved European standard proposition, and we've now been able to launch 1-hour delivery slots in key parts of the German market. In terms of technology, we've continued to make solid progress on our TGR program in the half. And as Matt mentioned, we have rephased the go-live as we felt it was the most appropriate thing to do as it was going live during this pandemic. We've also continued with a steady stream of consumer-facing tech releases. Two highlights I'll call out: one of paperless returns; and two, the rollout of a number of new payment methods, both of which we know are resonating with our customers. With that, I'd just like to hand back to Matt, and he will take you through some more detail on the COVID-19 response and the actions we've been taking. Thank you.

Thanks, Nick. Nick mentioned at the top of the call, the impact of COVID-19 on our business have been far reaching. The business has responded with a great deal of agility and flexibility to the challenges we have faced. Let me start first with supply product. Our initial focus is on the potential here for disruption, particularly from sourcing from China. However, that risk is monitored and managed through closely and the impact won't be material, perhaps a couple of weeks of delay to some intake, but we are comfortable with our stock position in this regard. We are now monitoring our European supply chain closely. A small number of factories have temporarily closed and some are operating at a reduced capacity. I will take you through the impact we are seeing in terms of demand in more detail over the next couple of slides. Whilst there is a range of behavior evident in what we have seen so far, it is clear that demand does undoubtedly remain in the market, albeit at a reduced level. Turning now to operations. The challenges we are facing here are fast moving, and we are working quickly to adjust on a day-by-day basis. As Nick mentioned earlier, our 3 warehouses are all operational. They were at reduced level of throughput capacity owing to the social distancing measures we have put in place. Available labor has presented a further challenge as absence rates have increased and border restrictions between Germany and Poland have impacted our Euro Hub labor pool. However, we continue to deliver our product in all major territories and to do so in a safe and healthy manner working collectively with our partners in this regard. Turning now to the reality of the demand impact we have seen and here, Italy represents a useful case study as that country is furthest through the lockdown period. Walking through the charts on the screen. You can see that the top one shows year-on-year sales growth. You can see on that a strong initial impact or a demand shock around the 8th of March as Lombardy and then the whole of Italy went into lockdown. This clearly reflects customers adjusting to the realities of lockdown with their priorities lying elsewhere. However, we can then see customers respond first to demand stimulation with a stronger uplift from our promo events, followed by a gradual improvement in trading through the closed lockdown period. If you look at the bottom chart, you can see that the initial impact of lockdown was evident in both visits and conversion. You can then see as the demand impact starts to moderate the traffic recovers with asos.com undoubtedly remaining a key part of consumers' lives. However, conversion remains subdued, reflecting ultimately the reduction in need for our product. And we would probably expect conversion to remain subdued throughout the lockdown period. It is worth noting that Italy might suggest a slightly stronger uplift profile than other territories as a result of lower online penetration and the closure of local businesses. However, we do see a similar consumer behavior pattern in the U.K., France and Germany. The U.S. is behaving slightly differently, and despite still being receptive to demand stimulation, the moderation of decline is looking more subdued at the moment. And this may well reflect the more pronounced economic impacts on our consumers here where government protection measures are less supportive for them in general. Whilst it is useful to see this pattern, it is important to stress that we are only 3 to 4 weeks into this crisis, impacting our demand and that these trends may not be indicative of what is to come. Let me now move on to what customers are actually buying. We are seeing a clear change in shopping behavior in line with the realities of being in lockdown. Loungewear, casual wear, beauty and laundry are all showing great growth year-on-year, as you can see on the left-hand chart. However, customers are clearly mixing out of dresses, swimwear and tailoring. A wide range of product means we can still cater to what customers want to shop, even in the time of crisis and our short lead times, particularly on ASOS Design, mean we can pivot relatively quickly. It may be that this behavior evolves as needs change and lockdown measures evolve or loosen, but our full product offering gives us the ability to respond to these changes and stay relevant to our 20-something audience. Let me now turn to the actions we are taking to ensure we have sufficient liquidity for this period of crisis. Firstly, I wanted to talk you through the flexibility we have in our model. Our cost base is largely variable and when you consider the main moving parts in our P&L, it's evident the scale of the business can be significantly adjusted on a 6- to 12-week time frame. We see an immediate benefit as fully variable costs such as distribution and transaction costs immediately drop away, reflecting the lower volume, and then we can realize savings across our semi-variable costs such as warehousing and marketing in time. Warehouse labor can be scaled quite materially on a short time frame, and we can alter that even further to 4 to 6 weeks out. Our stock generally trades on a 6- to 12-week cycle, giving us flexibility over managing our forward intake, particularly in the early part of a season. However, given the product dynamics, we will need to watch this carefully and manage our stock as best we can, given the uncertainties that we face. As you would expect, we have begun to take action to protect our liquidity and profitability. We are already managing our stock intake and have adjusted the profile to fit a lower level of demand. As I mentioned earlier, customers are still responding to demand stimulation and promo activity will give us some flexibility to trade through the product we already have in stock. We will, of course, need to balance this against our capacity given the health and safety measures we have in place. Given the different levels of activity, we have also started to adjust our headcount with support from the government furlough scheme where this is appropriate. We've also rephased a number of CapEx projects, as I mentioned. We are working closely with our suppliers across the business to agree payment terms, extensions and holidays where it is relevant to do so and have taken swift action on discretionary cost control. Let me now turn to our financing. We have run detailed scenario analysis, including trading at current levels for an extended period, temporary warehouse closures along with duration recessionary impacts. Whilst it is impossible to be precise as to all the impacts, we have stress tested our liquidity under these scenarios and are comfortable that with mitigation actions, there is sufficient liquidity within our existing GBP 350 million facility. However, given the high level of uncertainty as a precaution against even more severe outcomes, we are taking action to ensure maximum flexibility and headroom is available to us. We are in the final stages of putting in place an extension to our RCF facility of GBP 60 million to GBP 80 million to provide additional headroom to deal with extensive disruption and associated working capital requirements, ensuring we continue to support our business, our employees and our partners. Beyond this, we have this morning closed an equity capital placing of circa 18.8% of our issued share capital. The net prices for the placing, combined with the extension to our current banking facilities, will be used to provide sufficient liquidity and flexibility to manage the company through and beyond the period of expected and continuing disruption. These arrangements will: put sufficient financing in place to weather no improvement in current trading for at least 18 months; enable the company to emerge from the current crisis in a strong financial position to continue to invest in the growth of the business and to work supportively with our long-standing supplier base to mutual advantage as the industry recovers from pandemic; and avoid necessitating decisions being made for short-term liquidity or cash management reasons that may cause detriment to our long-term prospects and give ASOS the flexibility to restructure the business, if necessary, in the case of a prolonged downturn. As you can see, we have taken swift action to set ourselves up for whatever the future may bring. We're as well prepared as we can be and we'll continue to respond as conditions evolve in the market. I will now hand you back to Nick to conclude.

So this is -- ASOS delivered a record first half. The best first half that I've seen in my 11 years at ASOS. We've made great progress against our operational strategic priorities. Our current trading has clearly been impacted by COVID-19, but we've reacted decisively and swiftly to rightsize and deal with the business impact. The additional financing package we put in place, we've done swiftly. We've got a head of this problem, and we've announced this to protect the business and put us in the best possible position to react to whatever opportunities in front of us when we emerge from the current pandemic. Thank you very much. I'd like to go to questions. So let me just explain the protocol. Some of you already managed to do this, which is great. Please type your question into the question box. Alison will then direct the question to me, and either Matt and I will take it. So fire away, Alison, you're in the chair.

Great. Good morning, everybody. So first question here comes from Andrew Ross at Barclays. Working capital dynamics of the COVID-19 shock. What do you expect peak drawdown to be and the year-end outflow under your various top line assumptions?

Matt, do you want to pick that up?

Matt, sorry, I think you're still on mute.

Thank you, moderator. So I mean I think rather than be specific about the level of indebtedness because obviously, there are a lot of moving parts in there. I think probably the easiest way to ask the question is that under the scenarios we've described, we think that we have sufficient availability of liquidity under our existing GBP 350 million scenario. So depending on the scenario, and exactly when things were to happen, you would see different possible outcomes, but I think we're comfortable that we can weather those within the liquidity that we have available to us.

Okay. Thank you. Next question comes from Rocco at Arete. So U.S. delivery times, they're up 10 days currently based on their expectations and looking at the website. What is the percentage of U.S. orders that are currently being fulfilled from the U.S. hub?

Rocco, let me answer that. We've currently delayed the proposition on a number of our key services, not just U.S., also U.K., also Berlin. And the simple reason for that is we've thinned down the staffing to -- in all of those areas to give proper and social distancing measures. So that's the -- that's what we've done, and that's why. We've communicated that clearly to all our customers. So the customers understand why we've done it to protect our people, protect the delivery drivers. And so we've had a good response from the customers where we've advised it. In terms of the proportion of orders being fulfilled in the U.S. by the U.S., virtually all of them. So that's the whole thesis. The U.S. hub sorts the demand and fulfillment of that demand directly from Atlanta.

This one comes from Aneesha at Bernstein. Buyers still putting in new orders. Are you seeing further improvement in buying margin in half 2 as retailers cut off supply?

Do you want to get that, Matt? Or should I pick up?

Either, mate.

I'll start. The buyers are still placing orders, of course, and we've made some cancellations where necessary, but done it respectfully. And we do expect to see further progress in underlying gross margin going forward. Some of that will be difficult to see as the next few months will be noisy and turbulent in terms of different levels of promotional mechanics, different levels of discounting and certainly different trading pattern to one we've planned a few months early.

I think that I've got nothing to add, definitive, good answer.

Thanks, Matt.

From Ben at Investec. Why is inventory up 30%? How quickly can you clear this through?

So inventory at half year was up partly in line with sales and obviously, the expected sales that we would have expected in the second half. But it was also up slightly higher than that as we had actually sought to build stock ahead of Chinese New Year. So we deliberately accelerated our intake in January and February, and we would have -- we planned for a much lower level of intake in March. And that would actually be reflected in our net debt position, which is currently lower than it was at year-end as we've seen some of that stock unwind. In terms of the question about how quickly stock can unwind. It obviously depend on the sell-through. So as I mentioned, we typically carry somewhere between 6- and 12-week stock on a normalized basis. Obviously, in those product categories where we're seeing reduced demand, it may take longer to sell-through. But obviously, depending on the category and the product specifically, we will have a much longer time to sell it through. And as Nick has referenced, we are managing our forward intake appropriately. So we're trying to balance all of those things to try and come out with a balanced view of what the stock position is going forward. But clearly, we are operating with a high level of uncertainty, and therefore, it's difficult to be specific about how quickly or to what extent it's going to unwind.

This one comes from David Holmes, Bank of America. Can you talk about the CCFF? Why it's necessary you're considering accessing it and in what size can it be accessed?

For you again, Matt.

Yes. So we see the CCFF as, I guess, a complementary vehicle to the RCF extension, and if we're successful in securing the CCFF, we will probably step down our RCF extension. And the reason we're doing that is: one, is it's a cheaper source of funding; but also, we've been encouraged by our lending banks, where possible, to seek that as a replacement to free up the capital on their balance sheet to lend to other companies who perhaps aren't able to access it. So I guess it's in terms of trying to do the right thing to support overall liquidity in the broader market as well as what we need for our individual business.

So from Georgina at JPMorgan. Can you please talk about how some of the metrics have performed in the last 3 weeks, for example, returns rates and basket sizes?

Yes. I'll do an overview. Matt will give some more.

Okay.

What we've seen over the COVID-19 period, as the chart initially shows, and it's been consistent across all the pattern -- sorry, all the European territories, whereas each territory seems to be on a different part of the curve, depending on when social restriction is implemented. Traffic goes down initially and then starts to come back. We've actually seen last week and the week before the visit, in line with what the visits were weekly, prior to the pandemic. We have seen a lower conversion rate, however, through that cycle. And interestingly, we've also seen a lower returns rate pretty consistently across that. We think the lower returns rate is down to different products being sold. So clearly, Matt talked about dresses, going out gear, men's tailoring being performing less in this period, as you'd expect. And those are higher return characteristics. The product categories that are really resonating well, jog pants, sweatshirts, active wear, sneaker brands, health and beauty and lingerie. They clearly have a lower returns rate. So we think that's what's driving that. So I don't know there any other points you want to pick up, Matt?

No. Other than just to reinforce that again, we're only 3 weeks into seeing a demand impact. And therefore, whilst I guess, Nick's commenting on what we're seeing currently, I will be cautious about kind of extrapolating anything until we've got more forward visibility.

That's fair.

Geoff at Morgan Stanley. Please could you provide details of your current covenants and how far you expect them to be relaxed this year?

One for Matt.

Yes. So I'm not going to comment on the exact specifics of the covenants other than to say that the covenants we had on our existing facility were fairly standard covenants that you would expect on such a facility. I would say that we're still in the process of finalizing the discussions, but the banks are being supportive for an appropriate extension of that to give us the flexibility. So they're obviously quite sensitive numbers to the banks and to us but you can assume that we are getting to levels, which will give us a lot more flexibility than we would have under normal conditions.

Michelle Wilson at Berenberg. Where are you on the supplier renegotiations you kicked off last year?

They were all concluded, mostly before Christmas and some, post-Christmas, Michelle. So of course, there's more -- there's always more work to do on those things. Looking at the structure of the payments, the currencies and the payments and -- but there's -- the key elements in supply negotiations were concluded pre-Christmas with a few other things dealt with post-Christmas.

Anne Critchlow of SocGen would like to know how we're seeing marketing spend in terms of year-on-year increase/decrease for half 2 this year.

I'll answer that. I mean it's a completely understandable question, but it's difficult to give a specific answer. It will very much depend on the forward view of demand. But most of our marketing spend is performance-driven. And therefore, I guess, what you would expect, all things being equal, is that our percent of sales would broadly follow the demand trajectory that we see.

Olivia Townsend at UBS. Can you talk about the -- how you're managing newness at the moment? What has it looked like in the past few weeks?

Yes. Sure. Good question, Olivia. Clearly, social distancing meant that some of the activities in our studios, which was the bottleneck in getting some product live through the new regime, was tricky. So we've ramped up our [ Z Kick ] technology, which we trialed earlier in the season, and that can put around 1,000 products live. We've implemented flat shots that are starting to feed through now. So there's less styling, less hair and makeup of models. We've got ASOS at Home, where models are styling themselves with webinar interaction with our stylists and they're publishing content accordingly with our view. So that's been really good. And we've got contingency studios in Lewiston now. So we've got 2 studios -- sorry, 10 studios there, too. We've got another contingency studios -- studio. So we've got multiple options to create content and newness of product. In terms of physical product flow, we paused a number of our -- a number of -- quantum of our intake over the next 6 weeks, but we're still tripping in newness. So product flow still happening, still receiving in the warehouse. The key bottleneck of getting it live was through the studios. I hope that helps.

Simon Bowler at Numis. Are there any opportunities for improved intake margin given distressed levels of inventory in the industry? How do you think about approaching this?

Yes. Let me take that one, Matt. I talked earlier about the long-term margin trajectory. So if I talk specifically about what we're seeing now, we have been reached out to a number of brands who have been on our target list in many years. And they've -- some have reached out to us. So we've got some interesting conversations with some brands that we've wanted to achieve who probably haven't got the full e-commerce solution. So that's one aspect. That's not directly your answer to your question but it's talking about the opportunities we're seeing. Secondly, our outlet business, which normally buys off-season and surplus product from our branded partners and other brands, has currently got an awful lot of opportunity there waving through. Now we're also looking at taking some other surplus product from other -- our branded partners. And clearly, that will be a different margin discussion. So yes, we're alive to all of those issues, and we're working our way through them as well.

I think the only build I'd have on that though is clearly, it's a moment to be working collaboratively with suppliers in the best interest of both parties. So everything that Nick's saying is obviously important to be seen in that context.

Yes. Great.

[ Bill Kawas ] at JPMorgan would like to know how you're thinking about the economic impact on our customer demographic.

Sure. Let me go, first of all. [ Bill Kawas ], it's very difficult to know what the fundamental economic impact is going to be a firm, for anybody right now. I do believe, and it's a view that the economic impact is going to be far longer and far longer-lasting than the current pandemic. I also believe that there could well be an acceleration of e-commerce as behaviors change. We're all become accustomed to behaving differently. So I expect that to be an acceleration in channel shift. In terms of 20-somethings first, I am hopeful that they will come out being a little bit more resilient than the other demographic, albeit there'll be some economic impact in that segment. But I don't know the answer yet, impossible to know. That's our view.

I think the only thing I'd add is that, in general, the job retention measures that you've seen across the U.K. and broader Europe, you would expect to be particularly supportive of our demographic. Again, it's hard to be specific, but it feels like those things should give people a level of confidence about the resilience of their particular job. But again, as Nick said, we're going to have to wait and see.

Yes. Good.

Sam at Arete. Have you had any dialogue with governments having come under pressure from staff to close warehouses?

Thank you, Sam. Over the last 3 weeks, one of them -- either myself or a member of the exec team have been in daily dialogue with central government and also the local Barnsley Council. So we're very clear we're operating under their guidelines. We're very clear we're operating with under the public health guidelines. And in terms of staff, if you're talking about GLH, no pressure whatsoever. Berlin and Atlanta, very little -- no pressure whatsoever. Barnsley, a little bit more uncertainty about 10 days ago, but the staff on site in Barnsley can see the actions we have taken on social distancing. It's been signed off by 3 separate visits by the Barnsley Environmental Health Officer. We're doing our work in Barnsley with the approval of the local union being community union, which is a recognized union, and also the leader of the Barnsley Metropolitan Council. So all of those things have been put into place, and we're seeing very little uncertainty from our staff base or any pressure to close internally.

Michelle Wilson at Berenberg, would like to know, are we seeing any interest from new brands during the crisis e.g. Zara or H&M?

Thank you for that, Michelle. We are seeing interest from new brands during the crisis. But if you don't mind, I'll decline the invitation to comment on the 2 you've named.

Tushar at Goldman Sachs. Did you see demand improving for full-price sales in Germany and France in half 1? Sales growth beyond promotional activity?

Do you want to get that, Matt?

Yes. Again, I mean I think the momentum in Europe, and in France and Germany, specifically was positive across the whole of our sales mix. So partly because you see mixed baskets, most baskets that have a promotional item in, also have non-promotional items. But also because, obviously, the promotional activity drives new customers and then drives visits. So it has, therefore, been supportive of the full product mix.

Ben at Investec. Where did -- sorry, people are getting bolder on the questions, given they're coming through on chat. Where is the U.S. distribution costs benchmark relative to U.K. and Europe? Is there still room for further improvements in the longer term?

Do you want me to answer that, Nick?

Go for it.

So again, I mean they're probably -- I'll answer the question broadly in terms of warehousing and delivery costs because I guess that's behind the question. So I would say delivery costs benchmark reasonably competitively, albeit, obviously, the distances are quite significant. So actually, you might not see that in the P&L because, obviously, that just the size of the U.S. relative to most of the places we distribute from our European or U.K. warehouses. There's definitely room for improvement because we're still a relatively small part of the distribution mix. However, because we're working with some of our global partners, actually that we have quite -- we have access to good and relevant deals and pricing. The bigger part of the opportunity is obviously in warehousing where we run a manual operation versus the automation. And you've seen from the slides that Nick presented, the sort of impact that automation can have on a warehouse. So at the right time, when we reach the appropriate level of capacity, clearly, the opportunity to automate the U.S. would be a significant trigger to our overall fulfillment opportunity there.

Rebecca McClellan at Santander. How is ASOS managing forward inventory commitments given reduced demand? And what percentage of product is euro-sourced at the moment?

So it's -- so that we're reacting very quickly on this one, Rebecca. We've clearly turned down a number of -- a large proportion of our intake on both ASOS design and our third-party brands. A number of our partners in various territories have also gone on to a short-term shutdown like Mauritius and some aspects of Turkey. So that's also been helpful, too. We try to be as respectful as we possibly can with all our suppliers. We did not send a blanket e-mail. We actually manned the phones and went through the buying and retail channels to speak directly with each supplier. That also gave us the ability to understand the amount of opportunity or the amount of issues we're dealing with, from fabric, from half-made, to finished-made -- to finished product, to underwater. So that's how we did it. The trading team is doing exactly what they do normally. They're managing it daily and then reacting daily. We are chasing some opportunities in -- ironically, predominantly in the categories outside are performing well like Face + Body and Casual Wear. So it's -- but we're clearly taking a cautious approach on managing our intake and therefore, our stock profile and potential stock risk, too. Matt, anything I've missed?

No. I don't think so.

All right. Thanks, Rebecca.

I think we are pretty much drying up with new questions coming through, so unless anyone else wants to push a couple more. Sorry, it's -- a lot came through at the top, and we seem to have had a few drop off.

Alison, there's a couple I've seen come through. The couple of you have been asking about the social distancing measures that we've done to protect the warehouses. I'd like to direct you to the media part of our website. We issued a statement on Sunday, setting out where we were and what we've implemented on those things. I can tell you, our social distancing practices have been submitted to Public Health England and the Bays. The Bays part of government as a -- this is what we think best practice for social distancing in warehouses looks like. That's currently being reviewed by those. We've done that with a couple of other retailers. So that you'll see some details on our media section of website for that. I think that's it. Are there a couple more, Alison?

Coming through, sorry, it's a bit of a delay. Adam from Citi, what will EBIT drop through on loss sales look like?

Yes. That's a very -- I mean it's a good question. I see there's one from Tushar asking about gross margin impact as well. I mean the honest answer is, at this stage, it's very difficult to comment on the range of different outcomes. I guess what I can say is to reinforce what I said in the presentation. We have a fair degree of variability in our cost base. And therefore, you would expect that we are able to kind of adjust our large elements of our cost base, albeit not all of them to reflect the lower level of demand. However, we need to balance that against 2 things. One is we need to balance that against making sure that we are trying to manage the stock profile as a number of the other questions have alluded to. And also, we have to ensure that we're balancing the short-term measures against preparing for the long-term and making sure that we are setting ourselves up for potential recovery. All of those things are things we're going to have to evaluate initially on a week-by-week basis, and obviously, as we get more visibility on a month-by-month basis. So I think it's too early to comment on the range of possible EBIT and gross margin outcomes. But suffice to say that we're managing those in the way that we've described on the call today.

One more from Ben at Investec. Where is the U.S. distribution cost benchmark relative to the U.K. and Europe? Is there still room for further improvement in the long term?

We answered that one already, didn't we? I think you asked that twice, Alison.

Not having a good morning.

Thank you for asking it twice.

It was a very good question, obviously.

Is that it? Looks like it.

Yes. I don't got anything else coming through -- sorry, no, one more. John at Peel Hunt. To what extent will you over winter stock?

Good question. We haven't -- we're unlikely to do that in our core areas because obviously, the fashion aspect to all of those. But sort of the outlet product or product that we, of core -- of our core nature, where it might not be over wintering, but it might come out later. So we haven't decided yet, John. I don't think that's going to be a strategy that we'll deploy in any greater extent because of the nature of our product base, but clearly, we'll look at it where necessary.

Okay. One last question from Adam at Capitol Hill. What areas will the capital rates be deployed to if High Street closures create tailwinds for the business in the worst-case scenario?

Matt, do you want to talk about that?

Yes. Look, again, the range of our -- apologies, I feel I'm going to repeat myself, but I think the range of outcomes is so wide, what having the additional flexibility that the capital raise generates is that as we see opportunities, we should be able to invest into those. Whether that might be new brands, whether that might be to make sure that we can invest in stock ahead of a recovery, whether that might be to make sure that we're working to bring back employees before we see a recovery. It's all about trying to -- as much flexibility to do the right thing for the short and the long term. The specifics will depend on the situation that we see in front of us. And for me, that's the key thing with the raise today, is that it gives us the opportunity on the downside to whether no improvement for 18 months. And within that, to give us the flexibility, if that were to be the case, to start to reorganize and restructure our business. But on the upside, it means that we're not looking at liquidity and starting to use -- make overly short-term decisions, reflecting our liquidity position. And it's those 2 things we're trying to balance. But to be more specific at this point is, I think, premature.

Agreed. Alison?

So I've got a couple more that have come in now. Michelle at Berenberg, what level of net cash do you want to maintain going forward? How should we think about the appetite from investment here? Possibility of free cash flow positive in FY '21?

So again, I mean, there were a lot of meeting parts. As is probably evident from the previous market expectations and also from the trajectory displayed in H1, we would have been free cash flow positive, I suspect, under normal circumstances in FY '20. Again, depending on the outlook for FY '21, clearly, our expectation is that when we see a degree of normalization, we would expect to be free cash flow-positive business. But given the uncertainty as to how long the crisis is likely to last and what the extent of the recovery is, it's difficult to be more specific than that. But I think our attitude towards being cash flow positive through the cycle, it's still one that is unchanged by what we've seen and done today.

Absolutely right. Okay. Are we joined to a close, Alison?

Yes. I think that pretty much covers all the topics that have come through.

I guess, just from my side, I realized there is some more detailed questions that have come through, particularly early on, which, unfortunately, the way our system works, we can't necessarily see. But obviously, Alison and I will be available today to pick up some of those more detailed questions and specific questions as people kind of work through the details. So please do reach out to Alison in the first instance, and we'll do our best to come back to anything we haven't covered on the call today.

Brilliant. Thank you, Matt, and thank you, everyone, for joining us on our first ever results webinar. So stay well, everyone. Stay safe. I hope all your family and friends are well. We look forward to speaking with you again soon. Thank you very much. Bye.

Thanks, everyone.