Clock is ticking for ASOS

After a terrible set of annual results, management has launched a transformation plan to turn the business around. Our head of markets gives his assessment.

ASOS (LSE:ASC) has capped off a torrid year by swinging to a pre-tax loss as retail realities bite.

Although full-year revenue increased by 1% overall, this is one of few key metrics which the company will want to remember. A pre-tax loss of £32 million is far lower than the company’s own estimates and compares to a profit of £177 million in the previous year. Gross margin has declined from 45.4% to 43.6% in the year to 31 August, while net debt stands at £153 million as compared to a net cash position of £200 million a year earlier.

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Indeed, the latest announcement earlier this week that the company was negotiating new covenants on its revolving credit facility were taken as a sign of financial instability, prompting further declines to an embattled share price. The company has now confirmed that the additional financial flexibility of £650 million will give it some breathing space, but the issue nonetheless raises questions over general cash flow and even further pressure on margins.

Nor has the trading environment been kind to the company. Sales growth in the second half of the year was lower than the company expected, with an inflationary environment coupled with deflating consumer confidence impacting performance. There was also a notable increase in customer returns, adding not only to costs but also exacerbating the excess inventory which the company had hoped to clear.

At the same time the international operations have struggled, with the US in particular behind its projected return on capital. The UK has picked up some of the slack from its disappointing overseas performance, but ASOS has conceded that its supply chain operation has become inefficient, with additional freight, labour and delivery costs weighing on margins.

The company has also attempted to stem some of the decline by introducing markdowns on its items in an effort to attract new business. This is not aligned with its previous strategy and is more of a temporary relief but, even then, there is a further impact on margins generally.

All is not lost, however. Overall revenue growth was underpinned by a growing number of active customers, with its Premier customers slightly stepping up shopping activity. Demand shifted into occasion wear in the UK, which meant a higher average selling price, while in the US there was some success in revenue growth through the Topshop and Topman offers. Meanwhile, the growing partnership fulfilment programme is also showing some early signs of hope with, for example, 11% of total Adidas UK sales now being undertaken through the ASOS platform.

With outlook comments which reflect the likely volatility and challenges in the immediate future, ASOS finds itself at a crossroads and has announced a 12-month transformation plan which arches across the entire business. The areas which will be targeted range from the commercial model to the cost profile and from the balance sheet to the company culture and leadership team.

Such a sweeping transformation mid-stream is both ambitious and necessary. It will also bring execution risks as the company attempts to rebase its offering, and costs as the plan moves into more targeted areas, such as data-driven technology and marketing.

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It will also hope to repair some share price damage. Shares have declined by 81% over the last year, as compared to a drop of 24% for the wider FTSE250, and by 90% over the last two years. In that respect, the company almost has a clean slate from which to work.

Perhaps unsurprisingly, general market views range from one extreme to the other, with the overall consensus of the shares coming in at a 'hold'. To some extent, this tells its own story - the jury is out, the clock is ticking and the pressure is on for ASOS to deliver its transformation aims – and quickly.