ASOS Plc (ASC) Earnings Call Transcript & Summary

Good morning, all. I'm -- Matt and I are delighted you've been able to join us this morning. We're going to talk you through our acquisition of the Topshop, Topman, Miss Selfridge and HIIT, brands. And how this is going to accelerate our multi-brand platform strategy. We're going to talk you through how these brands will work within our vision and our strategy, and then we'll take you through the detail of the brands and financials. And then, of course, we'll hand over to questions at the end. Usual protocol on questions, please. Can you please state your name and question and will -- and Alison will get the answers or the get the questions to Matt or I. Thank you very much. Next slide, please. So the acquisition of these iconic fashion brands is an exciting moment for ASOS. It's a compelling opportunity to acquire 4 strong brands that are completely natural fit with ASOS. We know how they resonate with our core 20-something fashion loving customer, both in the U.K. and internationally. We know that because we've driven the online growth of these businesses since we started selling them on our platform. So we know them well, and we're confident in our plans for leveraging our market-leading capabilities in design, merchandising, marketing, and our strong operational platform to take these brands to the next level of development. We have the right to sell these brands in any channel now, and we will work with our retail partners to maximize opportunities. And we're particularly excited to be working closely with Nordstrom for the important North American market. Matt is going to take you through the financials in more detail. But in summary, this is a deal that is financially attractive, offering double-digit return on capital in the first full year, and we're funding it from our own cash reserves. Next slide, please. So just a quick reminder of our mission and strategy. Our mission is to be the world's #1 destination for fashion-loving 20-something. That all starts with having great product, the best product from the most loving brands and all anchored around ASOS' own brand. All that is delivered on one platform so our 20-something customers have no need to go anywhere else because ASOS has just simply got them covered. We supplement that with an amazing online experience. One that's inspiring, engaging, not transactional, and it's friction-free and convenient, delivered through a leading in-house tech platform and leveraging our global warehouse footprint. This is all supported by an increasingly efficient, effective and sustainable model, driven by a strong operational grip and leveraging the previous investments we've made. Next slide, please. So turning now to the acquisition. These brands are such a natural fit with the ASOS model, and they provide an opportunity for us to accelerate our strategy. These are brands we know really well. As I said earlier, we've driven the growth of these brands online. Having been the largest digital partner, we know how well they resonate with our customer, and we know how our customers shop them. So we're very clear on their strengths. And we're also clear on how they can be strengthened and grown further. We are bringing these iconic brands in-house, fitting them within our venture brands team, and we will overlay on them what we do best. And we -- and what we have proven we can do with brands such as Collusion, AsYou and, of course, ASOS Design. As you know, our ASOS brand is the heart of our model driven by capabilities at the core of our business, designing, buying, merchandising, amazing product in an agile, responsive way, all done with fashion, with integrity, which is nonnegotiable in the way we run our business. From a standing start, we have built a business of over GBP 1 billion in ASOS alone, ASOS brands alone, and that's still growing. Collusion, for example, is still growing at around 100%, having established itself as now a top 10 brand over the few years since we launched it. Acquiring these new brands is an opportunity to really accelerate our venture brand strategy, offering an increased choice of customer styles, product strengths and price points to our customer in addition to our ASOS brand portfolio and leveraging the skills we have nurtured in our own in-house designers, buyers and merchandisers. This time, rather than building it from scratch, we're beginning with great customer awareness and a strong brand history. We know there is more we can do with these brands. By making them even more relevant for today's 20-something fashion-loving consumer. Building these brands into our model also allows us to transform them into digital-first, and they will benefit from our leading online experience. In short, against the consolidating retail landscape, this deal makes perfect sense for us on every level. This is our consumer, and we can overlay some of what we do best, drop the brands straight on to our platform and our model. Having already built the capabilities and infrastructure over many years. This operation will come at a very low incremental cost to us. Next slide, please. So just moving on to a high level of the assets we've acquired. And then I'll take you through more detail of the brand shortly. These are strong consumer brands. In 2019, before the impact of COVID, they generated revenue of around GBP 1 billion across all channels. Last year, through the impact of COVID, they generated revenues around GBP 265 million through their own online channels and through their retail partnerships, and this revenue is generated from a broad international base. While the brand equity is strongest in the home market of the U.K., of course, almost half the revenues we still generate outside of the U.K., with more than 1/3 of those revenues coming from the U.S. and in Germany. Their own store-based expansion did prove challenging for these brands internationally, but we see the success in Germany and the U.S. as clear evidence of what we will further achieve under our ownership. In the U.S., for example, customers who buy Topshop from those have over double the order frequency and over 3x the value to ASOS. Next slide, please. These brands have continued to grow well when traded through the right retail models and channels, as their own online proposition undoubtedly have substantial room for improvement, it still grew at 5% through 2020, and retail partnerships grew 16%, supported by some strong multichannel operators. Within ASOS, you can see the growth we achieved. It was comfortably ahead on our platform. Through our last reporting period, we drove growth of over 40% with these brands. Customer and brand engagement is also very well established. These brands are 3.3 million active customers between them and attracted more than 200 million visits to their sites last year and have an impressive 11.8 million Instagram followers, all great evidence of the underlying health and strength of the customer engagement within these brands. Next slide, please. So I thought it's worth running through the positioning on each of these brands we've acquired and the product areas where we see further development opportunity. Starting first with Topshop. You all know this is an iconic brand with an established fashion heritage. The brand targets the higher end of the 20-something consumer and is positioned at a price point of our ASOS design. The brand positioning speaks what we call our seems to go, and you can share examples of this go on the screen. The brand is market-leading in Denim, something we absolutely maintained. We sold over 0.5 million powers of Topshop jeans last year, but our customers also love the brands with day dresses, and we sold over 300,000 of those last year, too. Looking forward in terms of product development, we see opportunity to build out the brands inclusivity on sizing and also reviving the footwear category within this brand. Next slide, please. Moving on to Topman. It's a unique menswear brand with an established smart to casual aesthetic for every moment for modern essentials through to formal wear. It also over-interjects in Denim. But further to that, fashion jersey tops are a particular strength of this brand. We sold over 300,000 t-shirts of Topman product last year alone. Here, we also see the opportunity to not only double down on these categories, what we call the hero categories, but to build out the inclusivity and improve the footwear offer too. Next slide, please. Miss Selfridge, this is a uniquely feminine brand with a girly playful look. It's targeting our younger customers with entry-level price points. The brand is strong in the more casual options, particularly day dresses. On ASOS, we sold over 0.25 million of day dresses last year throughout COVID with the Miss Selfridge brand. It's also got strength in jersey tops and their well loved petite range. From here, we'll be looking to maintain the price positioning while building out ranges for all this customer's milestone moment from proms to 18th birthday as well as again, growing out the inclusive sizing and building out the tool range. Next slide, please. Finally, turning to HIIT. This is an activewear brand we were very keen to develop. It may be less familiar to many of you as it was a sub-brand within the burden range, but we know it well. In fact, we represent over 80% of this brand's sales alone -- last year alone, having driven triple-digit growth through our platform, selling over 350,000 units, we're looking to take this further to the next level. You will likely all be aware how the activewear market has been growing and it's been further accelerated by the lockdowns we've all had to endure. But we've been seeing amazing growth through our platform in these categories. And standout performances from ASOS 4505 activewear brand, which grew over 90% last year. Hopefully, you will recall, our results back in October, where we highlighted activewear's strategic growth category for us. So this brand will, therefore, slot in supporting our ambitions in that category. And we look forward to developing it to sit alongside ASOS 4505 and within our growing activewear customer offer. In terms of specifics, it's an accessible activewear for lifestyle and working out. For those looking for elevated athleisure essentials, it's in line with the entry-level price points from within our ASOS 4505 range, but doesn't yet go to the higher technical performance fabrics that ASOS 4505 does. From here, we'll be looking to launch a more meaningful menswear offer as well as increasing the range of end users that this product and brand will cater for. Next slide, please. So let's look at how we're going to use ASOS capabilities to deliver a seamless integration. You know that we have market-leading capabilities already in design, buying and merchandising. We have some of the best buyers, designs and merchandisers in London and in the U.K., and their job is all supported by data. That is what's allowed us to build our own ASOS brands into over GBP 1 billion last year. You will know we've got an established warehouse, global warehouse and technology footprint. One that will continue to develop as we grow. We can leverage these skills and our platform to capitalize on the growth opportunities we see for these brands. Quite simply, we are dropping these brands onto our platform. We already successfully sell these brands but an expanded offer will integrate easily. That will further drive customer momentum because our fashion-loving 20-something customers love the engaging, friction-free online experience that ASOS offers. That all adds up to an acceleration of our ability to drive global growth at a low incremental cost to serve. Next slide, please. Another aspect of the transaction that really excites us is the opportunity to deliver growth through the right strategic partnerships. You saw earlier that these brands are growing strongly through the right retail channels. Players that are built and players that have built efficient models and know how to engage customers. By buying the IP of these brands, we have the ability to sell-through whichever channel, whichever model we choose. We will be selective, partnering with those that we think will best engage our customers and support our plans for the global development of these brands. We're particularly delighted that one of those partners will be Nordstrom. The brands already have a good presence in the U.S., but there's much more to go for. And Nordstrom is a fantastic partner to work with as we look to maximize the opportunity in the U.S. for these brands and ASOS too. I'm now going to hand you over to Matt, who will talk you through the integration plans and the financial benefits of this transaction. Thank you.

Thanks, Nick, and good morning, everyone. As we've worked on executing this transaction, we've also been developing a clear approach and plan for integration. As Nick has mentioned, a large part of our capacity to take on these assets is our ability to leverage our existing design, buying and merchandising capability, customer know-how and warehouse and technology infrastructure. In order to ensure we do this as seamlessly as possible, we've developed a clear set of principles and a detailed plan. We've also been really keen to ensure we have the right talent involved from the newly acquired brands as well as from ASOS. And last but not least, we started to build the integration into our broader business processes to ensure delivery of the business case is fully integrated into our usual management processes. In terms of the integration principles, there are 3 overarching ones. Firstly, prioritize the customer transition from the brand platforms to our own. Secondly, migrate the acquired brands into ASOS processes and don't invent new ones, increasingly, ensure that the brands are fully absorbed into our technology and warehouse infrastructure, and lastly, we thought wherever possible to choose the fastest route to integration in order to minimize the disruption to our customers, our people and our business. In order to do this, we've developed detailed plans for the first 100 days as we work quickly to integrate these brands into our business. To ensure the migration goes smoothly, we have agreed a short but detailed migration plan with the administrators. We've also worked closely with them to ensure future orders have been placed to ensure product keeps flowing through the spring/summer and into the autumn/winter season. There will be further work to do on the stock profile, but we are starting from a reasonable place. As has already been mentioned, key to the success of the integration will be talent, and we are bringing across the key roles and people we believe we need to continue to develop and grow the brands. These will fit neatly into our existing venture brand structure and become valued members of our team. The integration team will be led by dedicated ASOS talent. We have also been clear that in order to maximize the potential value of the acquisition, we need to ensure it is built into the fabric of ASOS. And as a result, we will integrate the business plan into our existing performance management processes and ways of working. That way, the delivery of the acquisition benefits will not sit on the side of our business, but will be part of business as usual and the responsibility of our whole executive team. Whilst it will be early days at our half year results, we will, of course, give you an update about how we are progressing against this plan. Moving now to the numbers. The acquisition of the brands and their associated IP will be for GBP 265 million worth of cash consideration. There will also be an initial one-off investment to build stock of around GBP 30 million, although I would anticipate that this is quickly sold through as we migrate the brands into our normal working capital cycle. As you know, January, February is typically our working capital peak but even after the acquisition, we expect to retain a net cash position at half year. This reflects the robustness of our cash position as we move into the second half of the year, which is typically cash generative. Turning now to our expectations with regard to financial metrics, starting with sales, where we expect additional sales in FY '22 to be broadly in line with those of the acquired brands in FY '20. This takes account of us driving growth through our platform whilst we also undertake a strategic review and rationalization of the existing retail partnerships. The transaction will be accretive to retail margin, supported by the transition of the acquired brands from third-party to ASOS brands. And whilst the gross margin on retail partner sales is lower, the net contribution margin is obviously strong. As a result, we expect this acquisition to be accretive to EBIT margin in FY '22. And overall, we expect to deliver a double-digit post-tax return on capital in FY '22 being the first full year post acquisition. Clearly, providing near-term guidance is tricky as we take the brands of administration as we will be focused on ensuring a smooth transition and setting the brands up for long-term success. However, our initial thoughts for the remainder of this year are as follows: as I mentioned before, we will be doing everything we can to ensure the long-term success of the brands. And as a result, we expect the incremental EBITDA generated in the balance of this year to be offset by initial investment and ramp-up costs as we focus on integrating these brands and relaunching them on our platform, engaging with retail partners and suppliers and rebuilding the stock position to support our future trading plans. We also expect to incur one-off costs of around GBP 20 million related to restructuring and costs associated with the transaction. These are built into our cost of capital calculations. Finally, there is no change to our underlying free cash flow guidance for the year. We will be able to give you a fuller update on our approach and expectations when we announce our half year results in April. So before we turn to Q&A, let me close with a summary and a reminder of why we are really excited about this acquisition. As you've seen from what we've shared today, we believe that this transaction represents a compelling opportunity to acquire strong iconic brands that will help us to accelerate the growth of our multi-brand platform. These brands are a very natural fit for ASOS. Our model is 20-something focused, and that is exactly where these brands resonate best. They can also be integrated onto our platform seamlessly and at a low incremental cost, given the capabilities and the infrastructure we have already built. In addition, these brands also present us with an opportunity to work with partners to grow our shared business, especially in the U.S. where we are excited about the combination of ASOS and Nordstrom. We see significant scope to increase awareness and in turn, further growth from these brands in this key market. And we are really confident that this is a financially attractive opportunity that will allow us to create value for our shareholders. Now we will take your questions.

Thanks, Matt. So as just a quick reminder, please state your name, bank and question, and Alison will navigate us all through it or use a chat box facility, as you all know.

Nick, we're starting with one from you here. We've got a question from Charlie Muir-Sands at BNP. Will be -- we use Topshop's existing suppliers? And how does that supply chain stack up in kind of sustainability buses ASOS...

Charlie, thanks for the question. You know fashion with integrity and the ethics within our supply chain are something that is nonnegotiable in the ASOS way of doing business. And so we will have a good look at the supply chain that we're inheriting. And any of those factories who do not adhere to our standards, our efforts will be brought out to our standard or we'll think differently about using them. That will be nonnegotiable. The flip side of that, there will be many great suppliers where we can look to consolidate and improve and get better margins, better volume, better standards. So not only will this be enhance the future value to the ASOS business, we'll be enhancing the standards over a greater supply chain, which will benefit everyone.

Taking on the sourcing and supply chain topics from Anne from SocGen, what sort of lead times will for these brands be sourced on?

So one of the things that ASOS is building increasing capability on is agile responsive supply chain through digitizing our processes on product. Now -- that's something we're doing really well on, not just sourcing, the way we design cut using technology to assist with all of that. We will be rolling that technology through our supply base that we've now inherited from Topshop, Topman, Miss Selfridge and HIIT. So I don't know the answer specifically on all the lead times on all of it. We have a guess, it's not as quick as we are right now, but that's an opportunity for us to enhance and improve.

Next question coming from Andrew Ross at Barclays. You mentioned the Topshop's online proposition was under invested. Perhaps you could go into some more detail here as to how you think it can be improved?

Andrew, it's going to be on the ASOS platform. So it's going to be really improved, Andrew. So we don't need to worry about investing in their platform anymore because these 4 brands are now liberated and -- the customers will be able to enjoy the ASOS tech platform that is market-leading and very well invested and we'll continue to get better. So that's -- hope that one helps.

Next question coming from Ben Hunt at Investec. How much have you [indiscernible] between the ASOS existing range and the newly acquired brands? Will you be looking to edit or rationalize the part of the ASOS range [indiscernible] with the ASOS brand?

I'll take that one again. Can we please have a question for Matt as well, please.

We're brand focus at the moment, but...

Ben. Right now, we have around 3,000 SKUs on offer in terms of the brands we've acquired, that will go to around 10,000. So this deal will give us greater choice, greater width, and then we'll continue to work -- we'll integrate this within our venture brand team, our designers, who were the existing designers and then we'll probably enhance the width in areas that we've called out that need further development. But that's future opportunity there.

Okay. This one is definitely for Matt. Charlie, again, at Exane, you've indicated a double-digit return on capital in the first full year post acquisition. Can you be a bit more precise on this [indiscernible] GBP 265 million would imply that you are betting at [indiscernible] in FY '22. Is that fair?

So the way we've thought about the calculation is we've taken the GBP 265 million. But as I mentioned in my comments, we've then added on the one-off costs associated with the transaction, the GBP 20 million. So that gets you to how we've calculated the cost of the acquisition. And then you are quite right to then take a double-digit percentage of that, which gives you the profit after tax. And then we've -- obviously, if you're trying to calculate an EBIT or an EBITDA off that, you can kind of run it back up the P&L. So that's how we got to those numbers. And that's how we calculated the return.

Next on comes from [ Greg Lawler ]. Given the Nordstrom retail channel, the Topshop, will you consider selling other ASOS brands through retail, which brands might you consider selling in the U.K. and other?

Thanks, Greg. So we're super excited about the Nordstrom opportunity that presents not only for Topshop, Topman, but also for ASOS venture brands and maybe as ASOS Design. Now the North American market is very important to our future growth aspirations, which is why this working with Nordstrom is something we're very excited about. We have the right and the IP to offer these brands we've acquired through any channel we want. And of course, the same for ASOS Design. So never say never to working with any of the retail partners, but it's something we will consider, but we will experiment in North America first.

Now, one for Matt coming from Emily Cooledge at Redburn. As the GBP 265 million sold by the brand, which was a product that was already sold on ASOS?

So thanks, Emily. I won't give specific numbers. But obviously, we are already one of the key retail partners. However, the way I would think about the GBP 265 million, in terms of the guidance we've given is that I would expect an incremental GBP 265 million of sales to be generated in FY '22. However, importantly, I'm not -- one of the key things we will be doing is integrating the brands fully into our platform. And therefore, I would anticipate that a proportion of those sales goes into other brands on the ASOS platform. But I would -- we would plan for that GBP 265 million to be incremental.

Next question again for Matt coming from Adam at Citi. Can this accelerate any CapEx deployment in warehousing?

So, no, it doesn't. We're obviously already investing in the fourth fulfillment center in the U.K., and we've also obviously commenced automation in the U.S. both of those should help us to integrate this smoothly into what we're already doing.

Next question probably for you, Nick, coming from Simon Irwin at Crédit Suisse. Press reported that you're potentially interested in running the Oxford Street [ flagship store ]. Is this correct? And what was the rationale for operating your [ first ]?

Simon. So you know we're digital pure play, and it's not our model to operate stores. We're approached to see whether we're interested in taking it. And so it's not a key priority for us. But if it becomes financially attractive, and we can find a partner to work with on that, never say never. So that's what was reported in the press, Simon. But not a key priority. We're digital-only. We've got some partners to drive in North America through Nordstrom and elsewhere and also in Europe. But if the opportunity and we have the right partner, we will have a think about that particular opportunity.

Next question from Simon Bowler at Numis coming for you, Matt. How do you think about migrating the brand's customer base on the ASOS platform? [indiscernible]

Thanks, Simon. So I suppose there were 2 elements to that. In terms of going forward, we would anticipate that the brands receive the same level of investment and support that all of our brands do. And therefore, I would be assuming a level of investment similar to the level of investment we put behind our whole platform. However, as part of our initial investment and ramp-up costs that I mentioned, there will be an element of marketing spend attached to that, allowing us to effectively relaunch the brands on our platform in due course when we're ready to do that.

Next question coming from Emily Cooledge at Redburn. How bolted on are the retail partnerships? Are there, for example, specific agreements that transferred across ASOS under new ownership?

We've got the choice to be selected with all of those, Emily. So there's nothing on there that we have to step into. We've just got the chance to be very selective and take the retail partnerships that we think are strategically advantageous to ASOS, the ASOS customer and our strategy in various territories.

Next question again from Charlie at Exane. Historically, ASOS management used to describe ASOS Design as [indiscernible] ASOS has been [indiscernible] prices, do you see these price points as sustainable?

You -- Charlie, your answer got missed by Alison. Can you just read it again, please, Alison, your question.

Sorry. Just asked the question, but it was historically, ASOS used to -- Topshop -- sorry, the Topshop as the -- so the Topshop product, essentially, we underpowered 20%, do we think with the same level of [ pricing content ], do we think that these price points are sustainable?

Yes, very good. So nothing that we've done this morning, Charlie, changes our pricing strategy for ASOS Design. And in terms of Topshop and Topman and Miss S. and HIIT, you heard be describe the price points where they sit. Topshop will be slightly elevated to ASOS Design. We'll continue to do that. So Topman, again, slightly elevated to ASOS Design menswear. Miss S. is absolutely at a very lower price point and targeting a younger customer, we'll continue and drive that harder. And HIIT is very similar price to ASOS Design already. It just doesn't have the elevation through the higher technical project. So we don't anticipate any change to our core pricing strategy or any change into where those are right now.

I think just -- I mean, just to reinforce that point, clearly, they've been sustaining that price on our website concurrently with our brands today. And obviously, they've been growing strongly as the figures we've given out today.

Next one for Matt from Anne at SocGen. What are the restructuring costs relating to, will they be stripped out as adjustments?

So they relate to all elements of the costs associated with bringing the brands out of administration and transitioning them on to our platform, so that will be some of the costs related to doing the deal. There will be some element of costs as we bring those brands across, and there will be some element of restructuring associated with how we take the organization and absorb it into our own organization. So that's broadly how the costs are. We will call out what those costs are. So we report them as one-offs. So you can separate them out from your underlying model.