ASOS Plc (ASC) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to today's ASOS analyst call. My name is Sep, and I'll be the operator of your call today. [Operator Instructions] I will now hand the floor over to Jose Antonio Ramos, CEO, to begin the call. Please go ahead when you're ready.

Good morning, and welcome, and thank you, everyone, for joining us at such a short notice this morning. I'm here with Dave Murray, our CFO; and Michelle Wilson, our Chief of Staff & Strategy. You have seen we have put out several announcements this morning. It's been a pretty busy start to the financial year here at ASOS. Firstly, we have announced a new joint venture with HEARTLAND, acquiring a 75% stake in Topshop and Topman. Secondly, we have launched a refinancing of our convertible bonds and have amended and extended our Bantry Bay facility. And thirdly, we have provided a trading update alongside these announcements. I want to quickly walk you through each of these announcements before leaving plenty of time for your questions at the end. Let's start with the joint venture. We are excited to enter a joint venture with HEARTLAND, who we will be acquiring a 75% stake in Topshop and Topman for GBP 135 million, representing a total valuation of GBP 180 million. ASOS Holdings Limited will hold the remaining 25% stake in which our existing partner, Nordstrom, will continue to hold a minority interest. We really believe this new joint venture is a win-win for our business, our shareholders, our customers and our ASOSers. Strategically, it builds upon the great work of our Topshop and Topman teams. We're leveraging on our new partners' expertise to grow the brands' reach through new channels. And financially, the new structure allows ASOS to monetize value today, demonstrating disciplined capital allocation while retaining a stake in the brand's future potential. The joint venture is the result of a competitive process, which speaks to the strength of the brands and the hard work we've been doing laying the foundations for their success. Now the next stage of that work begins. We'll continue to operate and focus on our areas of strength, designing the best product and providing a destination for style through ASOS.com as well as through the relaunch of Topshop.com. This is where we have a right to win. And in HEARTLAND, we have an incredible partner alongside us on our journey, a partner with whom we already have a strong working relationship and importantly, who has the complementary expertise and resources to unlock new opportunities, both online and offline and bring customers globally the best that Topshop and Topman have to offer. Next, I want to touch on our refinancing. Today, we have announced a refinancing of our convertible bonds. We have launched an offering of approximately GBP 250 million of convertible bonds due September 2028 and a concurrent partial repurchase of the outstanding GBP 500 million of convertible bonds due April 2026. We have also amended and extended our Bantry Bay facility to May 2027 with the option of a 12-months extension. As part of this, we have switched GBP 50 million of the term loan to our revolving facility, effectively reducing our blended interest rates. The net proceeds from our new joint venture, alongside with the new convertible offering and cash on our balance sheet, are being used to fund the current convertible repurchase. The goal of this is to reduce our net debt position while also proactively extending the maturity profile of our debt and additional flexibility to our balance sheet. We believe this improved financial flexibility will help accelerate our core Back to Fashion strategy. Finally, I want to touch briefly on our trading update. We have continued to make good progress on our Back to Fashion strategy, focusing on bringing the best fashion and the most inspirational experiences to our 20-something fashion-loving customers while laying the foundations for sustainably profitable growth. For fiscal year '24, we expected adjusted EBITDA -- we expect, not expected, sorry, adjusted EBITDA at the top end of consensus estimates. Sales slightly below the bottom end of our guidance range and all other guidance as set as fiscal year '25 -- '23, sorry, year-end remains unchanged. Subject to the impact of the transaction, we intend to provide a full update on our strategy and final guidance as part of our full year results in the coming months. During H2, we continue to progress on our Back to Fashion strategic priorities and making ASOS faster, more agile and more profitable. Few highlights I want to call out are Test and React, Partner Fulfils and returns. For Test and React, our program for improving our speed to market, which brings product from design to site in less than 3 weeks, we're on track to hit our target of circa 10% of our own brand sales by the end of fiscal year '24. For Partner Fulfils, our flexible fulfillment model, we have exceeded our fiscal year '24 target. Our Partner Fulfils now accounts for more than 4% of our gross merchandise values across approximately 100 brands. This is important as it brings our customers an even greater breadth and depth of products. And we have continued reducing our cost to serve using AI technology, personalization and improved imagery to improve our customer experience and reduce our total and underlying returns rate year-on-year. I appreciate we have covered a lot of ground there. I'll now open it up to questions, and yes.

[Operator Instructions] First question today comes from John Stevenson at Peel Hunt.

Can we speak on trading, please? Can we -- I guess, the implication of guidance this morning is that you still have double-digit declines -- double-digit decline, sorry, through the second half of the year. Can you give us some sort of clarity behind the second half momentum and maybe some color on the key territories, please?

I'm writing it down. Otherwise, I will forget.

Okay. And while you're writing that case, can I -- just a follow-on just in terms of -- while I appreciate that everything is sort of moving around depending on the level of the repurchase this morning. But what's the sort of the target net debt position for the business?

Yes. I'll take the first one. It's Dave. Thanks for the question, John. Just with regards to the second half, I suppose, when we gave our update at the half year, we did guide to the minus 5% to minus 15%. We are slightly outside of that. So you can expect that it will be in the area that you referenced for the second half, broadly consistent with those. But the point we've called out in relation to just where we are on our -- on like the consensus estimate with regards to EBITDA is, our focus through the second half through Back to Fashion has been on making sure that we drive the right sales and then -- but we've been making decisions to drive profitability rather than just purely going after the sales number. From a geography perspective...

Yes, I'm happy to put some color here, John. So let me just elaborate on what Dave was saying. Our intention for fiscal year '24 was always a year where we really focus on the transformation of ASOS and making sure that we have this foundation for sustainable, profitable sales. So we've been really focused on this balance between sales and profitability and the fact that our profitability comes at the top end of the range, it's really rewarding to see that what we have done, it pays back. So in terms of geographies, what we have seen during the course of the year is, obviously, I mean this is a very volatile market, so things change fast. But we are very, very, let's say, happy with the evolution of the different geographies. For instance, the U.S. is in a very good place in terms of profitability right now, and I know that for many of you has always been a concern, the very poor profitability of the U.S., we're in a much better right now. And the U.K. has also been improving during the course of the year. We have seen more volatility in Europe, especially in Germany. I don't know if that's -- do you want to move to the other question?

Yes. And regarding your second question, John, on the -- as you're saying, we're not getting specific on that is that it's not possible to give that answer today. I think the point that we have said is that actually, we've got net proceeds coming in, in relation to sale in the JV by HEARTLAND. We will be using some of that to repay down some of the debt that exists between us and Nordstrom. The unknown part, which is why I can't give a solid answer to that, we won't know where we end up on the completion of the bond between how that sits between both the exchange and the sender till later. So further guidance on that is going to have to wait until we get the update at full year.

Okay, that's fair enough. Maybe in that case, just before this start of this morning then, I guess, obviously, with the stronger EBITDA, you'd had eyes on sort of, I guess, low 200s in terms of closing year-end net debt?

Yes. So again, for FY '24, the update we've given is that just in relation to sales, and where we are on adjusted EBITDA. We are -- we remain confident with the other guidance and consensus as it exists for FY '24 that's out there. And though the guidance remains unchanged, but updates will be given when we get back all the results in a few weeks.

Our next question comes from Matthew Abraham at Berenberg.

I was just wondering initially if there's going to be any immediate operational impact following the establishment of the JV on Topshop? So that's the first question. The second question relates to trading. Given that you've guided to adjusted EBITDA being towards the top end of the consensus and sales probably below guidance, can you just provide some color as to what cost or margin outperformance you can serve to allow you to provide that guidance, please?

Matthew, let me take the first one and maybe Dave can take the second one. On the immediate operational impact, obviously, the answer is no. But let me elaborate a little bit because probably it's a little bit of a very short answer. One of the things that is very exciting about this joint venture is that it's really a win-win option that unlocks a lot of value for us. On one hand, it allows us to focus on what we do best, that is to create, to design, to buy and to sell through online channels. And on the other hand, it brings the best of our incredibly exciting partner who's one of the best performers and one of the best companies in the world and especially in Continental Europe and how we can leverage on their capacity to explore new geographies and new channels. So if anything, what is going to happen from an operational point of view is an acceleration of all the plans we have for the brand. We're going to continue doing what we do best, and it's a minimum impact. Obviously, we'll take a few months, probably, I guess, for our partner to ramp up what they want to do and do the acceleration, but we are very confident that this is an incredibly positive piece of news for Topshop and therefore for ASOS.

Yes. On margin as well, Matthew, thanks for the question. I've been here since May. I really know that I've got an amazing finance team. But you'll probably understand that we only closed on Sunday, and I'm confident -- and I'll just give the guidance I've given this morning just with regards to where we are on consensus estimates, actually breaking that down at the moment between margin, to your point, I think it was just a bit too early for us to make that call publicly. So it will be stuff that will be contained more in our sort of update towards the back end of October.

Next question comes from Sarah Roberts at Barclays.

So just quickly, can we have a clarification on the Bantry Bay loan. So the time loan is decreasing from GBP 200 million to GBP 150 million. Just to clarify, we should expect GBP 50 million cash outflow for the business this year? And how is that funded, please? And then secondly, can you provide any color on the sales probability for FY '24 just purely on the Topshop brands alone? I think previously, you've commented that Topshop tends to be more profitable than the rest of the group. Was this still true this year? Any color would be really helpful.

Yes. Sarah, just with regards to Bantry, yes, you can think of it as cash out, but it effectively is reducing the term loan as well. So it shouldn't have any impact on net debt. But actually, in the context of cash flow, all of these things are being managed together. So -- but you're right, the GBP 200 million is reducing to GBP 150 million. But it will be still one of our available facilities is where we draw. On Topshop, I think we've called out in the end that we said that it broadly represents I think it's 5% of trade that we saw in FY '23 and the performance that we're seeing through this year has been consistent with what we're seeing in the rest of the business.

Next question comes from Yashraj Rajani, UBS.

So just a follow-up to the previous one. I just wanted to get a sense of as we lap P4 from last year, where we had a cleaner stock position, how has your full price sell-through evolved, right? So what proportion of your cleaner stock is actually selling on full price? And are you actually seeing attrition of customers which were shopping on discount earlier, but given your bigger focus on full price, they're actually not shopping. So any update on that would be really helpful.

Let me give you a little bit of color there, obviously, with caution because we have -- as Dave said, we have only closed the year pretty much 2 or 3 days -- literally 3 days ago. So we are very satisfied with the evolution of the changes we have done in our commercial model. We see customers reacting very well to a more exciting and inspirational type of range, and we are not seeing any negative impact of a reduction in our promotional profile. I mean I think that without giving you any specific data, we are quite comfortable that this is the right direction of travel, and that is clearly connecting and resonating with our consumers.

Yes, you should have seen we called out on Test and React that we've now reached our target of Test and React hitting 10% of own brand sales, which is a full-price sales driver for us. So very happy with the way that's performing and how that set us up when we look ahead to FY '25 and then the performance in the kind of typically full-price months, which shows the kind of May, June, July has been pleasing, obviously, always has a bit more group discount period across the sectors. There's more discounting in that month for -- in full price periods, the brands have been performing very well, particularly in the Indian market.

Next question is from Georgina Johanan at JPMorgan.

I think you might have touched on or started to answer one of my questions in your last comment. But just to kind of follow up on that. Thanks for the color on the more -- on the trading in the second half. Can I just confirm that the performance was sort of broadly improving over the second half and the exit rate was somewhat better than that double-digit decline seen in H2 overall, just given your comments on the U.K. sort of improving in full price periods, and that is, of course, still your largest market. Second...

Yes. And Georgina, just to confirm on that point. In our key markets, we have sort of seen that improving trend as we progress through the second half. The number I've obviously talked about is where we expect the full view of the second half to be, but we have seen more positive trends towards the back half of that in our key markets.

Great. And has there been other markets kind of offsetting that? Or is it fair to say that broadly speaking, the trend has therefore improved versus that double-digit decline for H2?

Yes, there has to a degree some about choosing and others just probably more macro that we're seeing softening in Germany and from the U.S., we've just been a bit more targeted with regards to where we're trying to invest our marketing investments. Again, I've said that in the call that our focus now is on making sure that we're driving profitable sales. And some of that means we've turned down some of our marketing efforts in the U.S., which has sort of largely providing a little bit of a headwind to that U.K. performance.

The U.S.

The U.S. is providing headwinds to the U.K. performance.

Okay.

I see what you mean, offsetting. Okay. That's very clear.

Yes, offsetting.

In terms of sales, yes. .

Does that answer your question?

Yes, it does. Yes, it does, which I think sort of is a nice segue, I guess, into my next question. And I appreciate there's multiple moving parts, and obviously, with your sort of yet to finalize the bond refinancing and so on. I guess just as a fear sort of given the focus on net debt and cash and so on. For next year, do you sort of have confidence that you will have positive net cash generation based on the trends that you're seeing at the moment, the profitability work and kind of the level of interest that it's looking like you might pay? Like should we be expecting positive net cash next year or -- in terms of generation? Or is that not a given at this stage, please?

Yes. I'm not going to answer the question directly. I suppose the information that we've provided today is that actually, our underlying FY '25 guidance has remained unchanged. We are obviously going to see the GBP 10 million to GBP 20 million potentially of headwind on EBITDA as a result of the transaction with HEARTLAND, which comes about just with regards to the royalties on the asset. And then the other part of that puzzle is obviously the incremental cost -- the net incremental cost of the financing activity, which we really can't determine until that is finished and closed. So I can't provide a complete answer, but they are the 3 parts that you should be thinking about in your models.

Next question is from Anubhav Malhotra.

First one is on the -- can you hear me?

Yes. Yes, yes, go ahead.

All right. Good. The first one is on the Topshop sale. I just wanted to understand, did you run a competitive process? And did you receive other interest in the 2 brands, Topshop, Topman? And maybe some color how you arrived at the valuation that you did arrive at? And then secondly, again, on the sale of those 2 brands, you mentioned some exclusive design and distribution rights. Are these for certain categories? Or is there a certain period of exclusiveness that you have? And after that, the brands will be open to all to put on their websites and on their wholesale channels and stores maybe?

Maybe I can take the first one, so in terms of what's the competitive process for the brand lift it was in terms of how we chose the option that we chose. From our perspective, this is the kind of ideal combination of unlocking some value from Topshop immediately while also actually retaining Topshop from a customer and an ASOS pay zone perspective, which probably leads into your second question really in terms of what it means for us, is Topshop operationally, ASOS will continue to design the brand for global distribution. We'll still sell the brand to ASOS.com. We mentioned in the RNS this morning within the next 6 months, we'll also relaunch Topshop.com, which we're very excited about to bring a real home for the brand back to customers. And then ASOS will control wholesale distribution in the U.K. and North America though we already have a brilliant partner in Nordstrom and Nordstrom will remain positive joint venture, but we will also look for other partners and in the U.S. as well to make sure that we're reaching every customer which we think Topshop will probably do. And then we have, as Jose mentioned, a new partner in HEARTLAND to roll the brand out from a wholesale perspective across Europe and rest of world territories, the license that we have for the brands, it's initially a 10-year license, but we have the option to extend that multiple times to give us up to 25 year license in total.

Let me build a little bit on that answer because I think this is an incredibly exciting moment for all of us here at ASOS, and I wanted to share a little bit of this excitement. I think that Topshop is an incredible asset. We have always been very excited. It's a very vibrant brand. We have been working very hard over the course of the last 2 years to make -- to put it in a better place in terms of improving the creative direction, improving the quality and the design, cleansing a little bit the distribution. And we are very confident Topshop is in the right moment to accelerate and to go to grow and to, let's say, unlock all this excitement and all this capacity that it has. In that sense, ASOS is going to continue doing what it's done over the course of the last 2 years. We're going to continue designing the brand. We're going to continue bringing all this excitement, obviously in the categories where we work. We are not going to be designing the brand in categories where we don't work and as part of the ownership of Topshop because as you know we keep part of the ownership, we will be part of the decision-making that the brand might expand to other categories and we will be part of this decision-making. But anything that is related with the categories and the markets where we work, we're going to be there hand-in-hand with our partner to make sure we make the most out of this brand. And as I said, it's a very, very exciting moment that we are all ready to start this new phase of Topshop and ASOS together.

Next question is from Adam Cochrane at Deutsche Bank.

Given the sales and profit balance that you're striking, it's early days. But as we look at 2025, given that the weaker-than-expected sales trajectory across a couple of markets, are you going to have to reassess the balance between sales growth and profitability to get those markets back into growth? Or have the actions that you've taken on profitability have a one-off impact on the consumers that maybe you don't want or whatever in those areas, and they will sort of flatline from here, and we can see growth in markets such as the U.K., places like the U.S., we just have to accept that now without further investment, you can't get that balance between sales and profitability. So I know we might come on to it later with the full year results. But how are you thinking about the balance? What do you have to do to get sales growing again? Does it come at the expense of some further investments?

Well, that is a very interesting question, Adam. I think we should tackle this one probably with a glass of wine at a certain point in time because it could trigger a very long answer. I'm going to do my best to keep it short. So trying to go back to 2 years ago, not longer, we were obsessed with making sure that we were striking the right balance between growth and profitability. There is no healthy growth without profitability. And this is what we've been doing over the course of the last 2 years, making sure that our growth is profitable, that our sales are profitable. Obviously, that has had an impact on our sales. And we said very openly from day 1 that we were willing to accept it, provided that we would go to a level of profitability where we were happy. For instance, I think -- and we mentioned that before, the U.S. is a very clear example. It was always a concern that the U.S. cannot make profit, the U.S. can make profit, and it's becoming a very interesting market. It has taken a certain time and certain actions to do so. Growth is not going to come from compromising profitably. We want gross margin with profitability. Growth should not come from selling the stuff cheaper. Growth should not come from advertising to customers the only one that are buying promotion. Growth has to come from making our relationship with customers more exciting, more inspirational, bringing them better product, and this is where we're seeing the growth. I think that Michelle mentioned before how excited and happy we are with Test and React. We are selling 10% of our own brands or plus with hardly any discounts. Because when we bring the right merchandise to customers at the right time, at the right price, it sells at full price, and this is our direction of travel. In some areas, we have had to make some adjustments, and that has had an impact on growth. But we are very excited that some of these pieces, some of these actions or policies are now starting to have fruit. I think we will elaborate much more when we come with year-end results, but all our thinking is going in this direction. It's like we will not compromise having the right level of profit for sales because I think that I heard once that sales is vanity and profit is sanity. We like being sane and not insane. Sorry, I tried to keep it short. I could elaborate much more.

So just to come across on that further and I suppose bring that back the reason why we're on the call today, I suppose it also is the reason why we're super excited about the transaction we've announced with HEARTLAND. Because in thinking about product creation, style that the great thing about this deal is we retain access to 2 great brands to sell on our website, to launch Topshop.com and to also continue to monetize in the future about the other avenues of growth that potentially might come as part of this partnership. So all of those things play to where ASOS will and wants to go in the years ahead.

Next question is from Andrew Wade at Jefferies.

A couple of quick ones for me. I guess, first of all, just looking at the revenue trajectory. Obviously, at the half year, we were talking to sort of minus 5% to minus 15%. And I mean just reflecting on the scale of that, the midpoint there, and minus 10%, you'd have been hoping for sort of flattish revenue to get there, and we've done sort of minus 15-ish or a bit worse. I mean is it a big, big top line mix? And I guess I'm just interested to know, is all of that -- are we to understand that all of that is around decisions that you've made to target more profitable sales? And then -- so that's the first part. And then the second part is following on from that, I know if we sort of look back at your base case stress test assumptions, you've been looking for H1 '25 to see an acceleration to double-digit revenue growth. That obviously looks aways off now, given where we're at the moment. Is there any reappraisal required of the EBITDA margin uplift that you can deliver in FY '25, given deleverage from lower sales numbers? Or is the move towards profitability enough to drive that EBITDA margin up? So those will be the 2 questions.

Yes. Andrew, I'll take both of those. Just first point as far as clarification. You're right with regards to where we are on those ranges, which is what we said this morning. And with regards to whether they are all actions we have taken, I think this is probably a combination of both like I said, but the U.S. and Germany are 2 specific examples we're overseeing things that are different from both our actions and things that happen in macro. With regards to our base stress case as said, I think this will be something that I'll just give more update as we get further update when we get to the annual results, but I'm not going to give revised guidance on where we sit on FY '25. But we are -- we will be looking at all of those things, including both sales and our margin performance given our full focus on that, and we'll give a further update when we can.

Next question is from Charlie Rothbarth at HSBC.

Apologies if my questions are both clarity. It's my line being a bit faulty. What was the total headwind to EBITDA that you said? I've got GBP 10 million to GBP 20 million, that might be wrong. And secondly, what is -- what are the brand lift valued on your balance sheet at?

So yes, you're right. We did announce GBP 10 million to GBP 20 million. I also think we disclosed that the brand value on the balance sheet was GBP 165 million. The TV of the transaction has fallen with obviously GBP 180 million.

Our next question is from Mia Strauss at BNP Paribas Exane.

Just wanted to check if you've ever disclosed what share Topshop sales are of own brand? And then just not sure if you can comment on this yet. But at H1, you spoke about the inventory for spring/summer is quite important, the sell-through of the aged inventory. Is there any comment you can give us on how that's performed over H2?

So the first one was the share of the -- TopShop share of revenue disclosed on own this morning is about 5% of our revenue spend.

I'm not sure. Mia, sorry, I'm not sure I got the second question. Do you mind repeating it?

Sure. So I'm just more talking about the inventory. So at H1, we spoke about spring/summer was quite the volume of the aged inventory spring/summer in H2 would be important to watch how that sold through. So maybe if you can give us a comment on how that has performed and whether you've increased your level of new inventory intake.

Yes. We obviously gave you an update at the half year in relation to how we were transitioning to the new operating model and realigning our stock. But we made good progress to the point at the half year, we were completely done. And we made further progress through part 2 so that we can make sure that we get to the start of FY '25 with the right inventory we need to move forward with the operating model.

[Operator Instructions] So we have no further questions on the call. I'll hand the call back to Jose and the team to wrap up.

Yes. Well, let me just thank you all of you for your questions and your time. As I mentioned earlier, there was a lot to call out today. We are -- and as I also mentioned earlier, we are excited by this news, and we are convinced that it puts us in a great position for fiscal year '25. We have made good progress on our Back to Fashion strategy, and the joint venture and the refinancing are giving us the financial flexibility and the balance sheet strength to accelerate on the execution of that strategy. I'm very excited for the year ahead. And I'm looking forward to speaking to all of you again soon on our year-end results announcement. So thank you very much, and have a nice day.

This concludes the conference call, and thank you all very much for joining.