ASOS Plc (ASC) Earnings Call Transcript & Summary

Hello, and welcome to today's ASOS Trading Update Analyst Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'll now hand over to Jose to begin.

Good morning, everyone, and thank you for joining us on our P1 trading update. I will take you through some of the key aspects of our big period performance, and then together with Katy, we will be delighted to take your questions. As you might be able to hear, I have a bad cold, so apologies for my cough, and I hope it will not be too distracting. When I last spoke to you at our full year results in mid-October, 3 months ago, I outlined our Driving Change agenda on the measures we are taking over the course of this financial year. I was clear that despite our strong foundations, we need to drive real change at ASOS and to prioritize profitability and cash generation. Our plan is focused on simplifying what we do and increasing our flexibility and resilience in this volatile environment. This will drive more sustainable profitable growth over the long term, underpinned by a disciplined approach to capital allocation. With that in mind, what you will see from the results today, which covers the 4 months to the end of December is what we have started to deliver against this agenda, and we're pleased with our progress. Having a very busy period getting a plan underway. This plan will drive significant benefits with profitability and cash generation accelerating in the second half of the year. It will more than offset headwinds in relating to inflation and returns, which we are experiencing in the first half already. Encouraging progress in our change plan makes us more confident that we will deliver a material improvement in H2, following an expected loss for the first 6 months of the year. So turning to the numbers. Our decline in sales of 3% was broadly in line with our expectations in the period, reflecting challenging trading conditions and the prioritization of structural profitability, improvements and cash generation from a more disciplined approach to capital deployment. We are pleased with sales up 6% in Europe, reflecting good customer growth and improved basket economics supported by price increases. The U.S. was down 2% with a lower wholesale performance again as a drag on retail sales. Rest of the World fell by 10% as we cut back on marketing investment and we introduced changes to delivery charges and thresholds in several territories as a result of the account's profitability review that I'll cover in more detail shortly. On the U.K., sales were down 8% in the period, reflecting the weak consumer environment. There were some specific factors: firstly, in September, we sadly say goodbye to Her Majesty, the Queen, which had an impact on consumer sentiment, additionally, concerns about inflation and rising energy prices also made consumers feel more cautious; secondly, in December, it was affected by disruption in the delivery market, which eroded consumer trust in on-time deliveries. This meant we introduced earlier updates for Christmas and for New Year deliveries, and we reduced marketing spend. It's also worth noting, we were also cycling a strong comparative period in December 2021 as the Omicron COVID variant boosted online retail. Reported gross margin includes the impact of the majority of the non-underlying stock write-off announced at the year-end and was down 690 bps to 36.1%. Stripping this out is a broadly flat adjusted gross margin of 42.9%. We were pleased with the evolution of gross margin relative to the prior year as we progress through the period. We expect a significant improvement in H2, underpinned by the realization of the benefits from our Change agenda, along with a reduction in freight rates. As you may recall, we said at fiscal year '22 year-end that we expect freight rates to drive around 100 bps gross margin benefit. We are making excellent progress on Driving Change agenda, including forging ahead with the planned changes to our commercial model and implementing the majority of the profitability and cost mitigation measures. These measures will have an impact of more than GBP 300 million in the current fiscal year. In parallel, we're facing headwinds relating to inflation and reserve rate normalization throughout the year, but the benefits of our change agenda will accelerate in the second half to more than offset these headwinds by year-end fiscal year '23. The new commercial model will enable us to create a more relevant assortment on the ASOS platform and is already generating results in terms of full price sales mix, whereby in tighter, supported by our new centralized global merchandise planning team. We are taking a more targeted approach to clearance, marking down a narrower range of products more deeply. And we have added 21 brands to our Partner Fulfils model and expanded it into Europe. Finally, the physical destruction of the stock we have written off is progressing well and will support improved operational efficiency in our supply chain. Our program of cost mitigation and profit optimization measures is substantial and wide ranging. The actions on cost, which generate more than 40% of the benefits mapped to date, include measures relating to marketing, the closure of additional storage facilities and a reduction in overheads. The balance of the measures to direct profit, the remaining 60% of the program, include changes to buying, pricing proposition and include actions identified through our review of profitability in many of our markets. These actions are country-specific and range from increasing enabling thresholds and adjusting premier pricing to optimizing discounting by product and adjusting the price of our delivery services. Finally, we said in October that we will be reinforcing our leadership team and we are delighted to welcome Christoph Stark to lead our supply chain. Christoph brings a wealth of experience in logistics and fulfillment from high-profile online retailers, including Wayfair and Zalando. We look forward to updating you on further developments in our executive team over the coming months. Overall, while there is more to do, we have delivered what we set out to achieve in P1 in terms of the Change agenda, trading performance and our financial position. We have cash and undrawn facilities of circa GBP 430 million at the end of the period, and we expect a similar cash position at the half year and on-site where inventory levels are around 5% lower than they were at the year-end fiscal year '22. Most importantly, the actions we have implemented will deliver a material improvement in cash generation and profitability in the second half. These factors together underpin our confidence that we have ample financial flexibility to deliver our plan and that ASOS will emerge as a more relevant competitive fashion business capable of generating sustainable value for shareholders. And now I'll hand over to the operator, who will run our Q&A session. Thank you very much.

[Operator Instructions] Our first question comes from Michael Benedict of Berenberg.

I have 2, if that's okay. So firstly, are you able to give any color on current trading and any expectations for P2, please? And then the second one, you noted you're expecting to be loss-making in H1 but profitable for the full year. Is there any color you can give on how you expect a GBP 300 million to support H2 versus H1? And are you able to quantify that split, please?

Okay. Mike, let me just clarify those 2 to you. So in terms of current trading, we won't be commenting on current trading today, and the customer has reminded, so we saw 2 key impacts in P1 consumer weakness and nearly some COVID in December. We're expecting the Omicron impact to last until late of P2 because, of course, that's where it ran in the base period and obviously where in January and February of many countries in Europe and the U.K., going into lockdown after New Year. And we would expect consumer weakness to remain a theme for the remainder of the year. On the GBP 300 million, clearly, we've given that a part of full year profit optimization plan, and we said that it's weighted towards H2. But let us give you a little bit more color to help with modeling. So we expect the GBP 300 million to be roughly 1/3 in H1 and 2/3 in H2 weighted given the time of implementation. In terms of the offsetting cost inflation and returns rate normalization, that is weighted towards H1, so roughly 2/3 in H1 and 1/3 in H2, largely due to the return of rate normalization annualizing around H2. So as a result of this, as we've said before, we expect H1 to be loss-making, but there's significant improvement in the second half.

Our next question comes from Georgina Johanan of JPMorgan.

Just 2 from me, please. First of all, just on the RCF, I appreciate you commented on headroom. But can you just clarify on how much of that RCF was drawn down at the end of the period or how much you'd expect it to be drawn down at the end of H1? And then second of all, I mean, I think the comment that you've just provided gave some clarification on that. But should we assume that GBP 300 million is closer to GBP 400 million on an annualized basis then, please?

Okay. So let me explain this, George, to answer those. So you'll see in our new reporting, accounts what we had drawn down on the RCF, which was GBP 250 million. We haven't given any guidance as to how long and we're not planning to do so today. That would underpin this given our liquidity position, and we have ample liquidity for everything that we want to do across the period. In terms of the annualization of GBP 300 million, obviously, your math is correct. Clearly, it won't necessarily be that simple. So for example, we've talked about things like state orders in Lichfield. That will depend as we move forward, again, how much we start utilizing some of those. So in terms of general trends, we expect our structural profitability to improve into H2 and so that trends to continue because that's a core focus on what we're working for. In terms of direct extrapolations, as you would expect, it won't be quite that straightforward.

Georgina, if I can clarify one on Katy's answer. Clearly, what we're trying to do is to materially change the profitability profile of this business. As she said, I don't think we can do it in a very simple way, so like GBP 300 million 5 years. It's not that simple. But the ambition and what we are executing is a material change in the profitability of the business.

That's really helpful. And just a quick follow-up, if I may. May I just confirm in terms of the headroom number that you've given for the period end. Is that sort of implied cash outflow in the period, is that sort of normal seasonality? Or is there anything else there that we should be aware of?

No, it's not at all.

Our next question comes from Simon Bowler of Numis.

Two, if I may. The first one, you've spoken with regards to kind of low single-digit price rises and being seen to your own brand. Can you just give a sense of how you expect that to trend over the year ahead? I'm sure you would have seen kind of commentary from next more talking to kind of mid- to high single-digit price rises, whether that's something you're expecting to feed through your own brand as the year progresses.

Good morning, Simon. Let me take a little bit of a step back on how do we approach pricing because, obviously, the first thing that we expect to do is to protect our consumers and to offer them the best possible function at the best possible price. So pricing is always something that we treat with a lot of tender love and care, if I can use that expression. We also approach pricing in a competitive way for us. We don't follow a cost plus model, where we take inflation and we pass it to consumers. We make sure that our products are competitive in the market. We have seen movements in the market, and we have moved along with the market. So this low single-digit price increase is in line with what we have seen in the market in the U.K. on our own brands, and that's what we have done. I don't know if that's clear enough, Simon.

Yes. I mean, I think I'd expect this kind of inflation across some of those third-party brands would be running a bit higher than low single digits. So I wonder whether you're improving your relative pricing position at all.

Sorry -- then, sorry, I didn't get that part of the question. With third-party brands, we always respect the retail price. We don't underprice them. So if third-party brands are coming with a higher price, the consumers will find the same price in our operations that the companies in their normal -- I mean, in the brands directly, sorry. So when we're talking about pricing, well, the price of our own brands, that is the price we manage and we control.

Yes, yes, yes. No, I understood that. Okay. And then the second bit was just on the gross margin outlook, where you've kind of iterated expectations of an improving shape through the year. Freight, it feels like, it's quite an important part of that, and you've mentioned about 100 basis points. How much of that 100 basis points feeds into the second half. Is that all of that and therefore, freight effect to be 200 bps in the second half? And are there any other major moving drivers behind your second half gross margin expectations, for example, lower clearance?

So I guess, very simply, as you said, we said that H1 gross margin would be in line with P1 but we're expecting to see a material pick up come through H2. And -- but you're right, the benefit that we've talked about will come through in H2.

Okay.

Simon, if I may, when we look at the gross margin during the first half, the vast majority of the movement is coming from freight and pricing, as we said, but we start to see good development on other firms like the markdown efforts. And we expect that during the course of the second half that, that we'll come to fruition in a bigger level. So we are quite optimistic, and I think we have a solid team to say that about the evolution of gross margin goes in the second half.

Our next question comes from Miriam Josiah of Morgan Stanley.

And firstly, just if you could give a bit of color on trading in terms of the category mix and if you're seeing any signs of trading down. And then also, if you could sort of clarify what you're seeing with returns rate. It sounds like it's still above pre-COVID levels. Has there been any change around that? And then secondly, just on the inventory. So you said you expect inventory to be down 5% in the first half versus FY '22. So presumably, that base includes the write-off. If so, does that imply that the underlying inventories are up around sort of 8% on my calculations. Just if you could provide any more color there.

Okay. Let me take the first question, and then I'll hand over to Katy, if that's okay with you. In terms of trading and categories -- sorry, my apologies. In terms of trading an categories, obviously, as always, we see some categories going up and down. Formal wear, sneakers, performing very well. We are seeing some good prices in that front. And we're also seeing -- we will share that later with the media, but some big things like trends, like scarves going really strong with diversity. Performance, obviously, outerwear as well. And obviously, not everything is going well because otherwise, we will be posting an amazing growth. So -- but these categories outerwear, formal wear and sneakers, I would highlight them as a strong response. Then you also asked variable about returns and what we see, if that the change in trend that we saw, let's say, around April last year as a result of the war and the inflationary -- the cost of building crisis, is pretty much continuing. So we see that returns are high. They're not growing faster. They are pretty much stayed at the same level, which are above pre-pandemic levels, but it's pretty much what we see. Obviously, we will be analyzing, and as you say like that, right, that's a trend once we get to March, April because this is when this movement has started.

Yes. So in terms of the inventory question, you're absolutely right that the minus 5 at half year includes the inventory provision. And without that, it would be slightly up versus the year end position. But that's very much in line with what we're expecting, and we're expecting further improvement in H2 through improved stock terms as well. So we expect to end the year, obviously, down from the half year position.

Our next question comes from Nicolas Katsapas of BNP Paribas.

I have a couple of questions around the non-U.K. performance. If you could -- firstly, if you could provide some color on the European regional performance by country, telling us which markets did well, who did better and maybe there are some even ones that did worse. And then with the performance in P1 for the U.S. and Europe, has sort of changed your thoughts around rationalizing or potentially rationalizing your growth plans outside of the U.K.? Would you have alluded to your full year results?

Let me go step by step. On the first one, we don't give this level of detail. Let me give you on a little bit of a general overview without getting into details. Obviously, we see some countries ups and down in Europe. We have implemented in some of the countries as a result of the program that I was mentioning before of revisiting our profitability by country. Some measures in the context where the measures are having more, let's say, turnaround, then obviously, that the impact of performance has been in a little bit more severe. But overall, what we see is that the core countries are performing very well and that is very encouraging. So it's very good to see that the relevant countries in terms of size in Europe are having a very good performance as a whole. Then the second question that you were telling me about if these evolution has changed our thoughts. But basically, what we have done is we have put in place a program to make sure that the majority of the countries where we are operating and have a lot of stock, have a proper contribution in terms of profit. The program has already started -- its at least a few weeks in place. So it's early to draw conclusions yet. Obviously, if we see that countries can have a solid performance. There is no point in closing a country that is giving us a lot of profitability or absolute profitability. This is something that we -- it's still early to conclude. If we see that change -- of course, if we don't see that change then we will have to take our program of change in those countries to a different step as we indicated. As we said back in October, there are no secret costs. There is no point in taking an extreme measure before trying other measures, but if the first program of measures don't have the impact we want, then we'll have to go further. I don't know if that's what you were looking for Nicolas.

Our next question comes from Emily Cooledge of Redburn.

Just wondering around the balance sheet and the cash. So you've given us the cash and undrawn facilities number of GBP 430 million. But could you give us an idea of where you are in terms of net debt either at the end of this period or where you expect to be at the end of the first half?

So we haven't given that number, but it will be -- I would -- the numbers that we've given, it should be at circa GBP 200 million of cash outflow in H1, which in a very rough way, we can add on to the net debt at end of year 1.

Emily, if I may, that is pretty much in line with the normal shape of a year for us. So we always have more of a cash outflow in the first half of the year that we recover during the second half. If anything, we are a little bit ahead of our initial expectations. So we -- that's one of the reasons, not the only one where were pleased with the development of the Drive Change agenda because we're seeing that, that is reacting better than what we expected. But the shape of the evolution is pretty much in line with the normal evolution of the business.

Our next question comes from Emily Johnson of Barclays.

I've got a couple of questions, the first of which is in terms of the U.K. performance in P1, what gives you confidence that those issues are and the kind of underperformance is more one-off in nature versus prolonged? So for example, have you seen any improvement into January versus December as some of the delivery issues ease? The second question is in terms of your inventory position. Can you give a bit more color on that? So for example, what is the current composition of Autumn/Winter '22 versus Spring/Summer '23 inventory? Within that, how much is left to clear? And then the third question, which is related to that is it looks like you've done GBP 90 million of the write-down in P1. Can you talk about how much is left to go in P2? Is it closer to GBP 10 million or GBP 40 million? And in terms of the P1 write-down, are you able to give us a revenue was associated with that stock clearance and whether there are any geographical concentrations to be aware of, or whether it's the same mix as the group?

Okay. Sorry, I'm writing down, there was a lot of questions. Let me just take one by one. Let me take the first and then hand it over to Katy. So you were talking about the U.K. and our confidence on how things have changed. Here, I think we have to make -- not only talking about the U.K., but in general, make a difference between revenue and gross margin or profit or whatever you want to call it. Obviously, we see that the markets are very volatile. Our expectation is that they're going to continue very volatile. And this volatility has been bigger in the U.K., whether this is going to continue is difficult to anticipate. But what we are expecting is that this volatility will continue during the rest of the year. The delivery disruptions that we were mentioning seem to be easing, but they are not really over. But I don't think that we're at the end of the market. So that's why we are preparing the company, and that's why I keep on referring to this agenda and the profitability to be able to, let's say, to deliver the profitability to work. That is our obsession, and this is where we're focusing a lot of the effort. We are seeing that we are holding our share in the first weeks of the year and that is important for us, which means that our competitive approach is the level for consumers. But obviously, the evolution of the market, I think, is going to be uncertain. And as I said, sorry to repeat myself, but I think our activities would have been here for longer. I don't, Katy, if you want to take one on inventory.

Sorry, can you repeat the question? Thank you.

If there more color in inventory, Autumn/Winter, Spring/Summer and...

Yes. Let me tell the brief comments.

And then there was the question about the GBP 90 million of the write-off and if there's more to come during P2 and how are we going to allocate the revenue coming from these stock and if there's any geographical concentration. But did I interpret your questions properly or not.

Yes. Yes, that's it.

Okay. Perfect. Thank you. So in terms of -- we are appropriately speak around that sort of GBP 100 million is the balance -- the range that we've given is GBP 100 million to GBP 120 million, but some of that was actually extraction costs from warehouses, so from stockpiling mostly by half year for Autumn/Winter. And in terms of revenue, so far, it is absolutely material and we will obviously give more clarity on that at the half year.

In the geographical concentration, I think it's pretty much everywhere. It's more or less spread as our stocks are. So not concentrated on any specific warehouse or location.