ASOS Plc (ASC) Earnings Call Transcript & Summary

Good morning, everyone. I hope you're all well and safe, and thank you for joining our call to discuss P3 trading this morning. I'm joined on the call by Matt and Alison, and together, we'll talk through the performance and focus during the last 4 months, alongside our outlook. We'll then be happy to take any questions at the end. [Operator Instructions] So let me go to the next slide, please? So let me start with a brief overview of the headlines from Page 3. Can I just request that people on listen-only, mute, please, so we don't have any feedback. That will be great. Thank you. All right. So let me start with a quick overview of the headlines for P3. [ This goes into ] a little more detail [indiscernible] and the backdrop against the operations and some of the moving parts. First point I want to make clear is that our main priority throughout the period is protecting the health and well-being of our people and, indeed, the health and well-being of the people in our wider supply chain. This was reflected in strict social distancing implemented and adhered to across all aspects of our business, all the way from operations in our warehouses to how we shoot our product on models and how we supported our suppliers. We then work rigorously to manage performance within this context. Naturally, such an approach will come with some constraints, but we believe this is the right thing to do, given the nature of what we've all been going through. Within that, I'm really pleased at what we've delivered as a business. I have been thoroughly impressed by the agility, flexibility, creativity of our teams and the effort they have shown navigating the business through this crisis. In terms of performance, when we last updated during April, we had seen sales back some 20% to 25% [ for the last 2 or 3 ] weeks. So I'm pleased throughout -- that we have delivered a 10% growth for the period in retail sales. Item growth was up 15%, reflecting the impact of a lower ASP from the product mix and the -- from the product mix that we sold. And gross margin was 70 basis points lower than the previous year, which, in light of the adverse product mix, is testament to the way inventory has been managed throughout the period. Our underlying profitability and cash generation through the period was strong and reflective of the operational rigor with which we manage the business during these unprecedented levels of uncertainty. This means that despite the incremental costs we've incurred through the COVID-19 period, we're on track to deliver strong profit growth and positive free cash flow for this year. We've been very mindful of the impact of the crisis on all our people and the wider society as a whole. As a result, we will be repaying the furlough support we accessed in April. And obviously, we will not be accessing the further furlough bonus that's being made available by the government. I'm now going to hand over to Matt, who's going to talk you through a little bit more detail on the moving parts, the regional performance and how we adapted our trading stance to manage through the constraints we encountered. Thank you. I'll speak to you later at the end.

Thanks, Nick, and good morning, everybody. I'm going to start with product and demand. And as Nick mentioned, when we last updated in April, we showed you 2 ship charts that reflected the dramatic change in the product customers were shopping into activewear, casual wear and Face + Body and out of more occasion-led categories such as dresses and formal wear. This shape of demand continued across the period, reflective of a spring/summer without holidays, music festivals, weddings or the option to go out to bars, restaurants and clubs. Growth in lockdown categories has been extremely strong over the period, as you can see on the left-hand chart. However, this demand has come at the expense of growth in the categories where ASOS, and particularly ASOS Design, is most established and best known by customers: product for going out. The chart on the right-hand side illustrates the relative product mix in our business this time last year, and you can see occasion-led categories far outweigh the lockdown categories as a share of our product mix. Activewear and Face + Body are reasonably new categories for us and ones we were still focused on growing our offering in. However, we're really pleased with how Collusion and ASOS 4505, in particular, performed through the crisis. When you take these 2 charts together, you can see why the impact from occasion-led categories was more pronounced for ASOS overall than the strong performance in those lockdown categories that were thriving. Our teams have shown great agility in adjusting our product mix, but the scale of the shift in demand at a time where brands and factories were themselves facing severe disruption and lockdowns is a significant challenge to manage. We also wanted to make sure that we did not create further issues for our suppliers, and the net result was that demand for certain product did outstrip supply and certainly speed of supply. Looking forward, we are working closely with our supplier base to ensure we are positioned with the right products and flexibility to maximize opportunity across the peak period and the season ahead. We will continue to develop those categories which remain a long-term and differentiated asset for ASOS, alongside rebalancing our customer offer to reflect the recent shift in demand. Before we move on from product, the other element that is worth noting at this point is the further basket economic impact of this change in product mix. The first is the impact on average selling price, which is back 9% in the period, which, in most territories, flow through to ABV. Beyond this, those categories that outperformed also attracted an overall lowest gross margin. However, this has been, to some extent, offset by positive changes in returns behavior. Face + Body and Activewear generally show lower returns rates due to the nature of the product. And whilst we are clear that there could still be a backlog of returns with customers, we have seen a move to more deliberate purchasing, which is why we called out our net item growth for you this morning, as we believe that is more indicative of where underlying customer demand is. Turning now to warehouse capacity. As Nick said earlier, our priority was to protect the health and well-being of our people, and that naturally comes with constraints. One of the main challenges was the significant throughput capacity restrictions in our U.K. and European warehouses. These restrictions came about as we work to overhaul our process and operations to ensure effective social distancing in our facilities. Something we did in collaboration with local environmental health agencies, our recognized union in Barnsley, the community workers' union and the Barnsley council. Our warehouses are automated and mechanized, which results in people being congregated in certain high-density areas, such as pack benches, for example. So we had to go beyond just increasing the distance between people, and this took some time to implement. This was exacerbated further in Euro Hub by the border closure between Germany and Poland, which restricted a number of our workers being able to attend work. On the chart on the left-hand side on the screen, you can see what available labor was in comparison to our planned level. Capacity restrictions in RFCs (sic) [ RCFs ] [indiscernible] driving a reduction in ASP and has an even greater requirement for unit throughput. As a result, we took a number of customer-facing decisions to avoid stimulating demand we couldn't effectively service to ensure we didn't disappoint customers on our delivery promise and also ensure no one was tempted to take undue risk across our supply chain. As a result, next-day delivery was turned off for 7 weeks out of our U.K. warehouse and 5 weeks out of the Euro Hub. We also added up to 11 days to our standard delivery proposition, something we were upfront with our customers about before the point of order. Our capabilities here are the cornerstone of our customer proposition, and we are clear that open and transparent communication is key to building trust with this generation and our customer base. We kept them updated on the changes we were making and how we were prioritizing health and safety. Further to these proposition changes, we softened our promotional calendar and reduced our marketing spend, which I'll touch more on later. We have made great progress in restoring capacity, and this has allowed us to restore our delivery proposition across all key markets. We are continuing to improve capacity throughput further to ensure that our facilities can support peak trade whilst adhering to social distancing. As a part of this, we will be investing a further GBP 5 million of incremental CapEx to ensure workers are safe as we scale our capacity for peak. Turning now to customer engagement. We saw good engagement throughout the period across our social media channels and in traffic to our sites. This reflects the strength of our relationship with our customers and our role in their lives beyond that of a transactional platform. In April, we showed you the impacts on sales growth in Italy as it went into lockdown with a pronounced reduction in both conversion and visits. We said we were seeing early signs of a fast recovery in traffic, and that trend continued through the period, as shown by the chart on the left-hand side. We also said at that time, we would expect conversion to remain more subdued, reflective of the lack of occasions, holidays, festivals, going out, and weddings to shop more. The chart in the middle demonstrate that while showing an improvement in year-on-year conversion, it is still back on the year, something we'd likely expect to continue whilst events continue to be restricted. Turning to social media. We saw strong engagement through our social media channels. We had our strongest ever month for social media engagements in May with over 9 million likes, comments and shares, up over 90% versus the previous months, with customers reacting very positively to our content and the way it has pivoted to reflect the realities of lockdown living. As I mentioned earlier, we took a number of customer-facing decisions to manage the constraints. And considering this and our softened approach to marketing and promo in particular, we are pleased with the 0.7 million new customers added to our active customer base in the period. In terms of a bit more color within that number, new customer acquisition was particularly strong in international territories and those with lower levels of online penetration. Italy and France are particular standouts for us. Lockdown product was a particular appeal for these new customers, and that drove -- we drove strong growth through those categories. Reactivated customer growth was also good globally, but growth in spend from our existing customers was a little more subdued than usual through the period. And we think that this is to be expected given the change towards lower ASP products and the lack of occasion-led demand to shop with us. I will now turn to a little more detail on how these factors played out in our regional performance. Starting with the U.K., there are a number of factors at play. So I'll cover the most material ones. Reflective of the nature and scale of the U.K. outbreak and the U.K.'s approach to coming out of lockdown, we have seen a continued skew towards lockdown category mix. Given the usual strength of the NDD mix in the U.K., the U.K. also felt the greatest impact from our change in delivery proposition. As we were balancing the impact of our trading stance and proposition globally, we took decisions that did prioritize our international territories over the U.K. For example, protecting promo activity over Ramadan in the Middle East and switching some European territories to fulfill out of Barnsley. Both of these decisions further reduced our capacity for the U.K. but were important trading decisions to take. Further to that, as our most established home market, there was less opportunity for new customer acquisition in the U.K. We have, however, seen improvement more recently as the U.K. has started to lift lockdown measures. Sales performance in the EU was strong. Initially, we saw demand held up a little better than in some other regions, and we saw a faster and stronger rebound in underlying demand, reflective of the easing of lockdown. [ We saw ] good growth in both new and reactivated customers, which [indiscernible]. Turning now to the U.S. We felt a strong initial impact to sales growth here and a bumpy recovery in demand, reflective of the divergent approach to lockdown restrictions in the U.S. environment. From an ASOS perspective, our product mix in the U.S. skews further towards dresses and formal wear, and we don't yet have an established Face + Body offering in the region. The reduction in available airfreight did cause some disruption to our customer-facing stock offer in the U.S. as the growing stock pool still receives a good proportion of the airfreight from the U.K. This is now recovering its product lands, but it did impact product choice and availability in the earlier part of the period. Finally, we saw a good recovery in Rest of World and have seen the quickest move back towards a more normalized product mix here. The region responded well to the targeted promo calendar we ran, particularly through Ramadan in the Middle East. We took action in the region to protect basket economics in the face of significant increases in airfreight costs, which drove notable increases in both items for basket and ABV. I'll now hand back to Nick to wrap up.

Thank you, Matt. Hopefully, that was helpful in terms of finding more detail on Q3 dynamics. In terms of outlook from here, we continue to focus on trading through spring/summer in an agile and dynamic way. We are preparing for autumn/winter, setting ourselves up to maximize the opportunity ahead. We are working very closely with our supply base to ensure we build the right product offer in the face of a less certain demand profile, protecting those occasion-led categories that we know customers love ASOS for, but making sure we have greater flexibility to deliver the product that reflects the demand and the constraints of -- within the constraints of our supply chain. Progress continues in warehouses to ensure we've got the right capacity to execute over peak, a target we're confident of reaching in spite of maintaining the appropriate level of social distancing. In terms of overall demand while social restrictions remain in place, we're cautious on demand for occasion wear until a more normal pattern of social events resume, the timing of which is very hard for us to predict, particularly in the context of a potential risk of a second outbreak. We're also mindful of the medium-term economic consequences for our 20-something customers. We expect continued limited demand for occasion wear through the rest of this financial year. Despite this uncertainty, we're confident that our strong operation -- with strong operational growth we'll deliver much improved financial performance over the year. We expect to deliver substantial year-on-year profit growth despite the significant incremental cost and disruption we've incurred associated with COVID-19. And this is -- this year, we will return to positive free cash flow. Alongside this, we remain on track to emerge as a stronger, more resilient business. We -- as we look further ahead, we believe we have seen around 10 years of disruption in the last 4 months, and we are well positioned in this context. We are now much better capitalized with an increasing and more diverse and resilient and differentiated product offer and the global infrastructure to leverage going forward. This gives us even more and continued confidence that ASOS will continue in progressing as one of the few truly global retailers in e-commerce. Thank you very much for listening. We'll now hand over to questions. [Operator Instructions] And Alison will pick them up and direct them to Matt and I. Thank you very much.

Okay. So our first question comes from Eleonora Dani at Stifel. I was wondering what we should expect as a write-off amount related to the boohoo and PLT stock?

You will see in the commentary that we gave in the pack that we're not expecting any significant COVID-related stock write-off, and we probably -- we will exit this year with a much cleaner terminal stock than we've done in previous years. This is also including any potential write-off from the boohoo stock. We're not, of course, going to quantify all of those numbers for you, but just that we've got that. We are mindful and we've taken the impact of that during our year-end projections.

Next question is coming from [ Rocco ] of Arete. From a cash flow P&L perspective, can you talk about the follow impact and how this impacts 2020 PBT and when it will be paid back in FY '21?

Do you want to take that, Matt?

Yes. Sure. So from a PBT perspective, we -- the benefit will not be in our 2020 PBT. [indiscernible] as we just work that through with HMRC, but it shouldn't -- it won't affect 2020 PBT.

Next question is coming from José at Caixa. Asking if you can talk a bit about sales performance in June in order to assess the evolution throughout the period.

You want me to do that one, Nick?

Yes, please.

So I think -- I mean, in terms of how to think about kind of momentum through the period and potentially the exit rate, which I know is the topic everyone is very interested in, it is fair to assume that the exit rate is stronger than the average for the period. But as we flagged in the statement and hopefully, is clear from the call, we're still seeing quite a significant impact on occasion-led product. And therefore, we're not necessarily trading at the level we would have been pre-COVID. So it gives you a feel for kind of where that dynamic might sit.

Next question comes from John Stevenson at Peel Hunt. Can you give some more clarity on the removal of nonstrategic costs and marketing spend versus one-off COVID costs and the contribution this is making to profit growth?

I think that's Matt again.

It's Matt again.

So I mean, in terms of nonstrategic costs, everybody, hopefully, was -- saw the momentum that we delivered in H1. And obviously, we recorded a record PBT supported by that momentum on strategic costs. And that has definitely continued into H2, both the benefits that we derived in H1, but also, we've continued to make progress on that. In terms of the other moving parts in H2 profitability, we have seen a benefit from the dampening of our marketing spend and our promotional mix through the period, as is probably clear. And we've also seen the benefit of an advantageous returns profile through the period. So those things have been positive for PBT. However, we've also seen material incremental costs associated with COVID, and they've been in 2 particular areas. One is, as we've taken the social-distancing measures we just described, that has had an impact on the cost in our warehouse. And that's to do with the staggering of shifts, that's to do with the incremental cleaning we're doing. And so there's quite a lot of incremental costs going in there. And as I flagged on the call, there will be some further incremental costs to go in, and we're assuming those costs continue for some time. And then also, we've seen a significant incremental cost on airfreight. Therefore, particularly in Rest of the World, we've seen that incremental cost flow through to our P&L. As I also mentioned, we sought to mitigate those impacts through other actions we can take. But they have had a material impact on our P&L. So those are the moving parts in terms of profitability. If you take those in aggregate, I think it's fair to say that the nonstrategic cost momentum that we've got has underpinned the margin performance that we're guiding towards today.

Next question comes from Michelle Wilson at Berenberg. Have you seen any impact on sales or traffic since dropping boohoo products? Have you or are you changing the way you communicate with customers in light of the boohoo supply chain allegations?

Thank you, Michelle. No, we've not seen any material change in sales or traffic over the last 7 days, a discernible relation to the boohoo impact. Your question's gone. What was the second part of that again?

Are we changing the way we communicate with customers in light of the allegations?

Sure. The -- 5 years ago, ASOS reenacted the Fashion with Integrity Program, which has 4 pillars: it's about people, it's about products, it's about packaging, and it's around a route to net 0 carbon. We've been making great progress. We invested a lot in all of that over the last 5 years. One of the things that we weave into our communications, and we're going to do more of that, we were planning to do [ all of it ] anyway. We're just telling those stories about how we protect people in supply chain, how we build our products with an end-use in life, how we have significant sustainable-source cotton within our products, how all our garments are capable of being recycled and how our packaging is recycled and all the progress we make in all of that. So we're going to continue to dial that into our communication, and we were doing that anyway. But in the light of the boohoo allegations, it's ever more important that we tell those stories to our customers about the work we're doing on their behalf.

Next question comes from Rebecca McClellan at Santander. How are you expecting the promotional environment to evolve from here? And what are you expecting in terms of discounting activity through P4 and into next financial year?

Can you take that, Matt?

Yes. Sure. So as was hopefully evident from the charts, we're now trading unencumbered. And in that sense, we've restored a more normal promotional calendar. I think it's also fair to say that the promotional environment is busy. There's a lot of activity out there. And therefore, we are expecting a relatively high level of promotional intensity in P4 but not necessarily unusually out of the ordinary. I think, Rebecca, being able to be more specific about what might happen into autumn/winter, I think, is much less clear. I think, clearly, the spring/summer dynamics in part are dictated by people's stock positions going into spring/summer. And obviously, the autumn/winter cycle will be dictated much more by people's positions going into that. I guess what I can say at this stage is we're anticipating that there will be a normal peak period. People will still -- it will still be a key period for customer acquisition, and we're still expecting that peak associated with Black Friday and the trade into the Christmas period, and we're preparing for that in the way that we would normally prepare for that. The extent of that, the product mix are the things I think that are uncertain, and we're preparing for peak with us building in as much flexibility into our operations as we possibly can do. Because I think the hardest thing to predict is where product mix is going to be, especially in light as I flagged in terms of any potential second waves in territories, et cetera. So probably, flexibility is key.

We've got Dave Holmes at Bank of America who has asked a similar question but a brief follow-up. Have we noticed any change to that since physical stores have reopened in terms of the promotion environment?

Not a material difference, no. It was -- people were already promoting quite actively in the ramp-up period. So we haven't seen a particular material shift post stores opening. That doesn't mean that will change. I guess as we get towards the back end of the season, you may find that store dynamic becomes more significant. But currently, it hasn't generated a material shift.

Got another question from Michelle Wilson at Berenberg. Given free cash flow positive in FY '20, looks like you could have significant net cash at the year-end. What are the priorities in deployment of that cash?

Do you want to answer that, Matt?

Yes, I can do it. So I mean, I think the priorities are similar to those that we outlined at our half year results and associated with the fund raising. It's the net cash balance will give us the flexibility to make sure that we can prepare for future growth. And within that, it will give us the ability to prepare and trade strongly through peak. And then ultimately, for us to be able to deploy that investment where we see attractive long-term returns. To be more specific than that at this stage is probably not right. We'll obviously give a further update at the full year results in terms of how we see next year and kind of what our balance of investment and so on will look like for the next year and beyond then.

Question now from Geoff Ruddell at Morgan Stanley. So Kantar data suggest that the U.K. online clothing market grew significantly in the 3 weeks through first part of May. Do you expect that ASOS will be losing online share during P3 in the U.K.? Why do you think that is?