ASOS Plc (ASC) Earnings Call Transcript & Summary

Good morning, all, and welcome to our P3 results that we're doing today which, of course, covered the last 4 months to the 30th of June 2021. I'll start by taking you through a high-level overview of the results and a little bit more color on the Topshop integration progress and also our new partnership that we announced earlier this week with Nordstrom. I'll then hand over to Mat who will take you through a bit more detail and then perhaps some of the moving parts. And then the course, we'll hand over to questions at the end. So let me start. A quick overview of P3, P3 with another strong performance for ASOS against a volatile backdrop. The varied restrictions have an effect on changes in [ man hand ] and the global supply chain pressures have impacted our flexibility to the end. Our reported growth was 31% year-on-year for the group on a constant currency basis. But for clarity and comparability, we've adjusted the return [ on this movement ] from last year. So I'm going to refer to the underlying constant currency rates for the rest of the script. On an underlying basis, we also drove the strong sales growth of 21% across the group. This was driven notably by a very strong performance in the U.K., an improvement in the U.S. growth rate and a solid performance in the EU market. Now what's most notable, we have much improved performance in Germany. Our active customer base has grown well again with a further 1.2 million customers since H1, taking the total to 26.1 million active customers. And pleasingly, we've seen a reduction in the churn rate in our biggest market, the U.K. If it weren't for the uncertainty in lockdown restrictions, the rising new variants and with uncertainty around the holiday prospects, this has meant a more unpredictable trading environment for fashion. The changing environment combined with unseasonal weather has made it only frustrating for our customers, which also meant that it's been difficult to plan their lives and their wardrobe choices accordingly. Just to illuminate this, as an example, we saw surges for coats 1 week, up 77%. And then the following week, we saw dresses up triple digit. In spite of that, I'd love to thank the ASOS team for the incredible resilience and agility in helping us navigate this uncertain trading pattern. This, of course, is not without challenges as, across the industry, we have seen continued pressures on the global supply chain with global capacity shortages and an increase in delivery days for shipments coming out of the key ports. Moving on to Topshop. I'm pleased to say the brand has continued to perform strongly with sustained triple-digit sales growth since the acquisition. We see a continued step-up in visits in the -- since the customer relaunch and encouragingly, we see sustained increase in total visits across U.S., U.K. and Germany. This has been particularly strong in the U.K. with visits to Topshop products drove more than double the rate we saw pre-acquisition. We're also seeing a highly engaged Topshop customer who have both high frequency and higher ABV than our existing ASOS customers. I'm sure you saw that we're delighted to announce, and we did on Monday, we've agreed in a partnership with U.S.-based multichannel retailer, Nordstrom. This will drive growth in North America for us. This joint venture -- through this joint venture, Nordstrom will acquire a minority interest in the Topshop, Topman, Miss Selfridge and HIIT brands. Nordstrom has a strong history with Topshop, being the first U.S. retailer to offer brands in the U.S. market as far back 2012, and understands the brand and the customer well. And we look forward to partnering together to build out an exciting future for these brands. Nordstrom also has unrivaled physical and digital reach in North America with more than 350 physical stores alongside online platforms that attract almost 2 billion annual visits. Investment with Nordstrom also underpins a wider strategic partnership. This partnership will see ASOS debut in its first-ever in-store edit. It will be the best of ASOS Design, Collusion and the AsYou brands, which we'll be launching in selected Nordstrom stores and across nordstrom.com. I'll now hand over to Mat to take you through a couple of the key financial and operational highlights.

Thanks, Nick, and good morning, everybody. I'll start by taking you through the territory performance before moving on to gross margin, and then I'll wrap up by talking to the outlook. As Nick mentioned, we saw strong performance in the U.K. with 36% growth despite physical retail reopening in early April underpinned by a strong promotional calendar to catch the available demand. Towards the end of the period, the unseasonal weather, combined with continued COVID uncertainty and the increasing acceptance to overseas holidays and major events are not going to be a reality for most 20-somethings, contributed to increased volatility and enabled slowing of demand. We saw good growth in Europe of 15% despite initially a slow vaccine rollout and varying levels of COVID restrictions in place across the continent and Brexit-related delays from the U.K. to Europe impacting on our supply chain flexibility and increasing product lead times. As an example, what used to take us 4 days now takes us 20 days in terms of product from the U.K. to our German warehouse. Our share held up, reflecting the resonance of our strong product offer and customer experience among consumers. Performance is particularly good in Germany, although Southern Europe continues to be challenging, with tourism-related economic pressures disproportionately impacting 20-somethings. Pleasingly, we saw improvement in U.S. growth rate of 20%, which reflects our increased stock offer supported by stimulus checks and the removal of a significant number of COVID restrictions. Lastly, Rest of World trading declined 3% impacted by COVID-related disruptions to our delivery proposition in comparison to local competition with Russia, Australia and MENA all impacted. At H1, we noted the increasing promotionally intensive environment, and this trend continued in the period. Turning now to gross margin, which reduced by 150 basis points compared to the same period last year. You'll recall that at half year, we walked you through each of the various moving parts within gross margin, which comprised of FX and freight headwinds and change in product mix. These elements were broadly similar for P3 with continued FX headwinds in line with H1, along with freight and duty, which continued due to the global supply chain challenges, along with Brexit-related impacts. Moving now to product mix. Encouragingly, we are starting to see consumer demand shift back into our strong going out offer. In the U.K., whilst our casual wear business remained strong, we have seen an increasing shift into occasion wear since the lifting of restrictions. Our return rates have tracked in line with this shift back into occasion wear and are normalizing at an increasing rate. We see similar trends across the U.S. and most of our European territories, with Germany the most pronounced. Turning now to the outlook. Firstly, a couple of specific points. You'll recall that we issued a GBP 500 million convertible bond in April of this year with 0.75% coupon. Some of you may have already put it into your model, but it is worth flagging that this represents a GBP 6 million interest charge in this year and a circa GBP 17 million interest charge for next year, which will need to -- which PBT numbers will need to be adjusted for. Other than that, our full year PBT outlook remains in line with expectations. In terms of CapEx, all key investment projects are on track. However, we have been able to improve the phasing of our spend between years, which means our CapEx number for this year is expected to be circa GBP 160 million. We also expect return rates to continue to normalize at an increasing rate in line with the continued shift back into occasion wear. And lastly, we expect global freight and duty to remain a challenge going forward. As mentioned earlier, we saw a softening in the final weeks in June, largely driven by continued COVID uncertainty and unseasonal weather. As we sit here today, we expect the characteristics of recent trading to continue for the balance of the year. And as a result, we expect P4 growth rate to be broadly in line with the prior year comparable period on an underlying constant currency basis. This has been a year that we've consistently called out that there will be an increase in volatility. We've certainly seen that step up. And against this backdrop, we are pleased that our full year PBT outlook remains unchanged. And within that, that we continue to invest for the long term.

Thanks, Mat. As Mat just said, we're continuing to invest in our business across our unique ASOS brands, our ASOS platform and our ASOS experience. All this will continue to be powered by our ASOSers, by improving technology and our enhanced global warehouse capabilities. We strongly believe the structure of the global e-commerce fashion market has changed forever. This will drive an increase in online fashion sales over the long term. And we're confidently investing in our business to achieve that opportunity. I'll now hand over to questions, operator.

[Operator Instructions] Our first question comes from John Stevenson from Peel Hunt.

Two questions from me, please. Firstly, on active, it looks like you have sort of a 5% increase on the headline numbers you put out this morning. Can you talk a little bit about sort of signs of improving churn and how active growth is in the States and Europe and how that's been changing? And the second question is just on the sort of normality trade and then if you can give, again, a little bit more difference in terms of how mix and returns rates have changed over the territories and maybe give a sense of how close to normal we are now.

John, I'll -- Mat will pick up both of those questions.

John, so on active customers, so I think -- I mean our active customer base by territory, I guess, kind of reflects the trading -- broadly, the trading performance. So other than the kind of the strength in churn or improvement in churn that we've seen in the U.K., I would say that the performance has been fairly similar across the territories. So there's probably nothing notable to call out there. It kind of reflects the overall performance that we've talked about today. In terms of product mix and returns rates, so product mix is -- I think the best way to answer is, if you look to F '19 levels as a proxy for pre-pandemic and you look at F '20 as -- or certainly, F '20 second half as a proxy for kind of the heart of the pandemic, the reality is that the product mix is somewhere in between those two. And I think that reflects where consumers are. Consumers have significantly more freedom in most territories than they did this time last year. But people are still far from living normal lives, as I'm sure everyone on the call will recognize. And our product mix reflects that. Returns rates are on a similar trajectory. They're not back to pre-pandemic levels, but they're also not where they were at the heart of the pandemic. So our expectation is, over time, that those things will both continue to kind of go back towards more normal levels. It's hard to know what normal looks like, I guess, and particularly over what time frame that's going to happen. And as we flagged today, consumers are living in very uncertain times and their behavior reflects that.

John, just on one thing on active customers. We continue to see a very strong increase in our Premier customers, and that's ahead of actual active customers as well. So we're not going to give those numbers out. But in terms of color, our active customers and our -- sorry, our Premier customer membership is growing faster than our active customers, and that's most notable in U.K. and U.S.

Our next question comes from Rebecca McClellan from Santander.

Can you just talk a little bit more about Southern Europe, what's going on there? I think previously, you said it was mainly Spain. Is it a broader thing now? And could you give us an idea of perhaps the weakness in demand that you've seen? And then, finally, as tourism does open up, would you expect there to be some sort of underpinning of the trend?

Sure. Let me [ deal with that ], and Mat will give you a couple of details. In Europe, we have seen the strongest growth continue in France and a much improved performance in Germany. And we're very pleased about that. But we have seen a very poor demand profile in Italy and Spain and some of the other parts of Europe for probably the best part of the last few months. So that's been the key trend to call out. Mat, anything you want to add?

Well, just -- I mean I guess, Rebecca, we do think that the situation is related to the income associated with tourism. So I guess if it does pick up, we would expect that to have an impact. I guess the challenge is calling with certainty whether it is going to pick up or it's not going to pick up. It's quite difficult. You know, obviously, the U.K. put the Valley back on the amber list, and Germany and France have both said that their tourists shouldn't visit Spain. So I think we're trying to call it as we see it today. I think one of the challenges we've had in this and in other statements is knowing with any clarity kind of what the basket of things is going to do going forward. I mean were that to happen, it certainly should pick up.

Yes. At this time, normally, people are thinking about the holidays, their holiday outfits, their festivals or events. All those kind of fashion choices have certainly been delayed. Whether they will come back with -- one day onwards looks a little bit questionable at this point in time, Rebecca.

Our next question comes from Simon Bowler from Numis.

You spoke to it kind of at the end of the call around kind of continuing to put investment into the business to grow and see opportunity ahead of you. Can you just give a bit of color on where some of that investment fell during P3 and where your immediate plans are for that to go? I guess kind of whether that's in kind of pricing, marketing or other aspects of the proposition.

Sure. Simon, I'll do that. So certainly, I mean we flagged at the half year the investment we were making in pricing, and that will have been a feature throughout the course of P3, and we would expect that investment to continue into P4. So that is a good proportion of where that investment is going. We have also continued to invest in marketing where we see the opportunity. So they've been the 2 big elements of investment. But we're also, I guess, building out capability in a number of different areas, in technology, although most of that investment will sit in CapEx, as you know. So we are continuing to invest in all of the elements of the business. I guess where it's most notably going to hit the P&L is that investment in pricing and the marketing spend.

We now have a question from Michael Benedict from Berenberg.

Just a couple from me, please. Appreciate the circumstances over the back end of June were unfavorable, but I wondered if you could give some color on how you're thinking about, I guess, the coming weeks with lockdown restrictions in the U.K. ending. Clearly, the weather is improving day by day. And then the second one, just on your priorities for the cash from the convertible bond raise, would be interested to hear further.

Sure. Let me have a go at that, Michael. So what we've intended to do and always intended to do is just saying clearly how we're seeing things and set our expectations so you can see what we're experiencing and all of those things. We've continued to do that again this morning. We always thought there's going to be a moment where there could be volatility, and it kind of has been extremely so in June. In terms of the balance of the year, we've called it as best we can. It's a short period. The weather did improve in the U.K. and people do feel more able to travel and more events come on. That would be really helpful. But it's a short period. And so -- but by all means, they're going to be extremely helpful for us. I'm sorry, what was your second question, Mike?

Just sort of the priorities for cash from the convertible, yes.

Sure. So back in April when we did the convertible, we have 2 priorities: to enhance our flexibility to accelerate our organic growth, i.e., invest hard to add more; and secondly, to give us the agility to pick up any acquisitions that would help turbocharge our growth where necessary and where we thought the opportunity arise. One of the things that we learned through the Topshop acquisition is having the agility through cash means you can actually move quickly and get assets if you want them. Now of course, there's a very high car we apply on those. They've got to be 20-somethings. They've got to be core categories. They've got geographical expansion and have got a strong ROI. So those are the 2 principal reasons why we raised that money, and they remain consistent today.

Our next question comes from Simon Irwin from Credit Suisse.

Two questions for you. Firstly, can you just talk us through kind of where we are with TGR in terms of the kind of rollout, what you're finding, where you're able to kind of switch off legacy systems, et cetera? And secondly, just going back to the question on active customers. Do you know how much of the increase in recent quarters has been down to former Topshop or Arcadia customers? Do you think you've kind of milked that opportunity yet? Or is there still a kind of big list of people that you've kind of yet to approach?

Okay. TGR went live several months ago. The old systems have been retired and it's working extremely well, no issues whatsoever. The planning -- all the next-season planning has been done on it. And so that's been an extremely successful implementation. What's important about that is then that moves our attention for us to invest more heavily in our platform capability. We haven't mentioned our flex fulfillment program this morning, but that's something we'll be talking to you about again shortly. That's on track. And we're expecting to heavily invest in that capability, that platform, to improve our connection with our customers and the ability to scale our top line faster than the requirement of landing more distribution synergies. In terms of the active customers, Mat will give you some numbers if he's got them. But we haven't yet exploited Topshop, Topman brands with full potential. And so we're expecting far more of those, particularly with North America and particularly within Germany. If you recall, when we acquired Topshop, [ we set ] the bottom. In 2019, that was GBP 1 billion brand. We acquired it for GBP 265 million plus with some stock on top of that. Our plan is to return that to around GBP 1 billion brand and indeed, in North America, actually also in the U.K. and then in Europe. And so what we're building with Nordstrom isn't just a wholesale relationship, we're building a multichannel model that will have B2C, reverse B2C, leveraging their capabilities, leveraging their data, leveraging their stock pools but, more importantly, for ASOS, leveraging their eyeballs. Think about $10 billion worth of eyeballs going to ASOS brands and Topshop, Topman brands with our full offer in North America. So our target is to return the Topshop, Topman brands through the 2019 revenues with a digital-first offer and augmented by the store offer in North America.

Okay. And then the product you're supplying to Nordstrom is going to be sold to them as wholesale customers. Is that correct? Or is it some kind of kind of a franchise or a marketplace type of deal?

No. So the joint venture with Topshop, Topman brands, which is -- that they've invested in, it will be sold at a commercial margin. And the ASOS Design will be sold at a commercial margin, too. Does that answer your question, Simon?

Yes. No, that's fine.

The next question comes from Charlie Muir-Sands with Exane BNP Paribas.

Given the slowdown you flagged in recent weeks and the volatility by category, obviously, counterbalanced by the fact that you're talking about delays getting inventory in, what's your view on how clean you'll be able to exit this year or the summer season collections? Secondly, related to that, if you hit that PBT that you're anticipating, can you give us a rough indication of where you might be for net cash, please?

Mat, do you want to take that?

Yes. So on the cash, Charlie, our guidance is unchanged from half year. So it's overall -- we talked about being cash positive in the second half of the year and also that other than the unwind of the working capital that we flagged at the start of the year, we'd expect to be cash flow positive over the full year. So the expectations are broadly unchanged. There will be -- it links, I suppose, to a little bit to your first question. The only uncertainty, I guess, around cash will be exactly when we bring product in for peak and the exact timing of that with the global supply chain pressures as they are. It's possible that could have a cash flow favorable impact if it comes slightly later. Obviously, we're looking to do everything we can to secure that product and then might end up with a slight kind of working capital move. But other than that, I would guess that's all kind of encompassed within the guidance. From an exit in terms of stock, we're proactively managing the volatility on our stock and we're using -- actually, Nick was talking about TGR. One of the strengths that TGR gives is an ability to be more dynamic and more targeted in how we do that. So at this stage, I'm relatively comfortable with where we're likely to exit the year but notwithstanding the fact we've still got 7 weeks of trade left to go. So I'm comfortable at this stage. But clearly, the volatility is making that harder rather than easier. But I think we've got the tools at our disposal to handle it.

Charlie, the main priority beginning now is we've [ made that stuff only for the end of season ]. And we're already planning also winter. And we intend to [ set ourselves up to do great also in winter ], we do expect, with the new capabilities we have. TGR is one of them. [ We also do with Nordstrom and really launching Topshop, Topman in there, with Miss Selfridge and HIIT brands in Europe and America ]. Our job is to exit [ clean with these products, reset ].

Our next question comes from Olivia Townsend from UBS.

Just on P3, I was wondering if you could give us a bit more information on the other KPIs during the period. Am I right in thinking the basket size should have improved and anything on order frequency as well? And then my second question is just on some of those gross margin pressures that you were referring to in the statement. I'm just wondering how much visibility do you have on things like freight costs into next year. I'm thinking kind of length of contracts, timing of renegotiations, that kind of thing.

Nick, I can pick those up. So just in terms of freight, so I mean we do have contracts in place. But my expectation that, based on everything we know today, is that freight rates are likely to remain elevated at least for the rest of this calendar year. But it is fast moving. I'm also aware that a number of the big shipping companies are looking to ingest a significant amount of capacity into the system. So I think it's unrealistic to expect that they will materially improve between now and the end of the year. I'm hopeful that once we get past the peak trading period that we will start to see those pressures alleviate quite significantly. But it's a very dynamic situation, and I could be proven wrong on the upside or on the downside. In terms of the broader KPI set, yes, we've seen some improvement in average basket values, albeit given some of the trends that Nick was referring to, perhaps not as much as we might expect in recent weeks. Frequency is definitely positive and probably particularly outside of the U.K. I guess what we've experienced over the last almost 18 months since the pandemic started is that the less frequent shoppers are probably the shoppers who've chosen not to shop. But what you've been seeing is our most engaged customers everywhere will continue to engage. And therefore, our overall frequency and the quality of customer base has probably gone up over the last 18 months. And I think as we referred to the half year, the customers we've acquired through the pandemic appears to be, on the whole, at least as good as, if not slightly better, than our existing customer base. So I think the underlying dynamics on the customer base are reasonably positive. But again, we're in the kind of middle of a shift from through pandemic to post pandemic. We're somewhere in the middle. So we'll know a lot more in a few months.

And just to give you a comment on basket by territory, the baskets have improved on a value and a size basis, most notably the U.K. and U.S. and in Germany within Europe, too. Those are following the key trends we've called out today, Olivia.

Yes. And maybe if I could just quickly follow up on point about freight and the capacity. So just to clarify, you have no kind of concerns about availability into, like, early next year but then will kind of see what happens after that in any region. Is that right?

I wouldn't say no concerns. It's a challenging environment. So particularly, out China, there are significant delays. But we're confident that we're doing all the right things. And therefore, that we'll be able to manage it. But it is challenging, and there will be product shortages across the industry. But what we would hope, as I think we've done through throughout the pandemic, is that we would do better rather than worse in the context of the overall market.

This concludes today's ASOS P3 Trading Update Call.