The ASOS share price has surged on news that the retailer’s freshly-minted turnaround plan has helped it return to profitability.
At 376.5p per share the business was last 14.8% higher on Thursday and leading the FTSE 250 northwards.
ASOS said that sales weakness across all its territories meant group revenues fell 11% in its third quarter, to £858.9 million. At constant exchange rates turnover slipped 14% year on year.
Sales in its core UK marketplace dropped 14% in the three months to May, while the top line shrunk 4% in the EU. Turnover reversed 15% and 13% in its US and ‘rest of world’ regions respectively.
Yet despite these drops the retailer returned to profit in the quarter, and adjusted earnings before interest and tax (EBIT) rose £20 million from the same 2022 period. Its EBIT margin meanwhile increased 250 basis points over the period.
The bottom line was boosted by a £200 million worth of profit optimisation and cost savings. ASOS has targeted £300 million of benefits for the full year.
The number of active customers on its books dropped by 800,000 from the 24.9 million reported at the half-year point. ASOS said that this reflected “a continued focus on improving the profitability of sales over the pursuit of growth at any cost.”
Profit per order rose 30% year on year as the firm sought to improve the performance of underperforming fashion labels and territories.
“We Are Delivering”
ASOS chief executive José Antonio Ramos Calamonte said that “we are delivering on our plan to turn the business around: to right-size our stock; to generate cash; to reduce our net debt; and to structurally improve our profitability.”
He added that “I am confident in the direction we are going, we have restored profitability in the period and made good progress in clearing through our inventory to generate cash.”
Full-Year Forecasts Unchanged
The business said it “will retain its focus on profitable sales and its commitment to reducing inventory for the remainder” in this financial year ending August 2023. And it kept its full-year guidance of “low double-digit” sales growth (excluding Russia), and adjusted EBIT of £40 million to £60 million, unchanged.
ASOS added that “while the company remains cautious on top-line outlook for the year ahead, the actions taken will continue to have a positive impact on profitability and cashflow.” It said it “expects material cash generation in financial 2024 and therefore a further reduction in net debt.”
A “Mixed” Result
Neil Shah, director of content and strategy at Edison Group, described ASOS’ latest trading update as “mixed.” He said that the release “reflects unfavourable external circumstances mitigated by internal operational changes as sales kept falling but profitability improved.”
Shah noted that “the group still feels the effects of a post-pandemic return to in-person shopping.” But he added that today’s statement provides “the first real sign” that its self-help measures like inventory reduction and faster clearances of unsold stock are paying off.
Aarin Chiekrie, equity analyst at Hargreaves Lansdown, commented that “the drive to right-size the disproportionately large level of inventory is making progress. There’s still work to be done on this front, but getting this excess stock off the books will provide some tailwinds to margins moving forward.”
He added that “full-year guidance has been maintained and the recent cash injection from the equity raise provides some breathing space to navigate any choppy waters ahead, but brings with it additional pressure to turn the group’s fortunes around.”