ASOS pins hopes on turnaround after losing a fortune

Investors aren't impressed with this set of half-year results, and shares in the online retailer have given up a chunk of this year's gains. Our head of markets explains why.

The strain of the enforced transformation programme is showing at ASOS (LSE:ASC), although there are some early chinks of light.

Ultimately, the company identified that it had, in places, become inefficient and that certain customers, brands, partnerships and indeed geographies were becoming untenable. The group has therefore battened down the hatches to drive towards a more sustainable model, with the current priority being profitability over growth.

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In the meantime, the decks need to be cleared, which has inevitably come at a cost. The previously announced stock write-off of £128 million, property impairments and closure costs such as the Head Office function, each contributed to an overall pre-tax loss of £290.9 million for the six months to 28 February, widening the loss of £15.8 million the year previous.

Amid a challenging trading environment and with the attention of management elsewhere, revenues slipped by 8%, with sales down by 10% in the UK, 7% in the US, 12% in the rest of the world and flat in Europe. The company also noted that in the currently squeezed consumer environment, some shoppers are choosing to return to physical stores, which has caused a challenging online environment for the group, even though sales remain higher than pre-pandemic levels.

The main focus of the group at present is to streamline and focus on the future. Markdowns have been reduced, a more disciplined marketing spend has been put in place, changes have been made to the overall proposition and there is currently less breadth of stock, concentrating on more profitable lines where possible.

ASOS previously guided that its “Driving Change” agenda would release £300 million of benefits for this full trading year, and in the first half £100 million has so far been achieved. The group is confident that the vast majority of actions to achieve the £200 million in the second half are already in place, to the extent that ASOS expects a return to profitability and cash generation for the remainder of the year and beyond.

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Adjusted gross margin showed some resilience, dropping slightly from 43.1% to 42.9%, helped by lower freight and duty rates, and with the tailwinds of a year-on-year reduction of inventory of some 20%. The winding down of excess storage facilities and a general eye on cost containment are also further evidence of the importance and level of detail to which the company is aspiring.

There is little doubt that there is never a perfect moment within a rugged retail environment to be undertaking a transformation of this magnitude. Even so, the change was necessary and the group has strings to its bow which could yet prove to be a saviour, such as its targeted demographic of 16 to 35 year olds and a selection of price points which gives the consumer a wide choice. There are also signs of life in some of its partnership lines, with the company singling out the success of the Topshop brand to date as an example.

There are undoubted signs of progress in these numbers, which also underline the scale of the challenges which remain.

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The shares have had a particularly torrid time given the backdrop, having fallen by 51% over the last year as compared to a marginal decline of 0.6% for the wider FTSE250, and by 30% in the last three months alone. Over a two-year period, the shares are down by 87% and by 90% over the last five.

Many investors are taking something of a wait and see approach to the group’s ambitious plans, with the market consensus of the shares as a 'hold' reflecting a number of investors not yet ready to commit to the transformation story.