10th May 2023 12:22
(Alliance News) - Shares in Asos PLC plunged on Wednesday after the online fashion retailer reported significantly weaker interim results, leaving several analysts unconvinced by its turnaround plan.
The stock was down 16% at 536.80 pence each in London on Wednesday midday, the worst FTSE 250 performer.
For the six months to February 28, Asos said revenue declined by 8.2% to GBP1.84 billion from GBP2.00 billion a year earlier. Pretax loss widened dramatically to GBP290.9 million from GBP15.8 million a year ago.
Asos said the outcome reflected "both deliberate actions on capital allocation to improve profitability and a challenging trading backdrop.
It added that, in addition to "widespread cost of living concerns and their impact on discretionary spend", consumers have returned to stores post-pandemic causing online penetration to "step back" in the short-term.
Russ Mould, investment director at AJ Bell, was unimpressed by that explanation: "The company implies the economic backdrop has been unfavourable which has hampered its progress. It's at times like these that consumers look for bargains which means Asos's decision to cut back on markdowns is somewhat ill-timed. Yes, it is prioritising profits over volumes, but it also needs to be in tune with what the consumer wants.
"Asos has suffered in the past from having too much inventory and too much discounting, which has essentially made the customer associate the brand with cheap products. If it takes away the discount carrot, then customers are going to turn their nose up and shop elsewhere."
Mould concluded: "ASOS has been the architect of its own mistakes and is now paying the price."
Back in October, Asos announced a turnaround plan. It said it would look to improve inventory management, reduce its costs, and "reinforce" its leadership team and culture. The plan was one of Jose Calamonte's first acts as chief executive.
Asos hoped that by battening down the hatches it could drive towards a more sustainable model, with profitability being prioritised over growth. The plan included reducing markdowns, more disciplined marketing spend, and changes to the overall proposition, with less breadth of stock.
CEO Calamonte said on Wednesday that he was "pleased" with the "rapid operational progress" achieved following the company's focus is on improving its core profitability and the prioritisation of "order economics over top-line growth".
For Richard Hunter, head of markets at interactive investor, the change was "necessary".
"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," he explained.
Other observers were far more pessimistic.
"Asos, like Zalando, is focusing on disciplined capital spending and accelerated execution of its strategy. However, there are concerns regarding Asos's ability to protect its brand equity, particularly in relation to deep discounting to clean inventory," commented analysts at Shore Capital.
"This could pose challenges in selling products at full price in the future. Consequently, we view Asos as a particularly vulnerable player in the current context," Shore concluded, placing the stock at 'sell'.
Analysts at Liberum took a similar stance: "We retain our 'sell' rating on Asos as we see significant risks in the strategy outlined by the group to improve profitability and remain unconvinced that it will be able to fully deliver on those promises.
"There remains significant risk that, in a plausible downside scenario, the group may need to raise further cash from the equity market at a significant discount to current share price which keeps us from going any more positive on the stock."
Liberum lowered its price target for Asos shares to 500.00p from 700.00p. The new target is 6.9% below the current price.
By Heather Rydings, Alliance News senior economics reporter
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