26th Sep 2023 13:02
(Alliance News) - Asos PLC delivered a mixed update on Tuesday, as the fast fashion firm's aim to revive its fortunes was damped by poor summer weather in the UK during July and August.
Asos shares fell 1.2% to 382.20 pence each in London on Tuesday afternoon.
The company divided opinion, as analysts weighed up guidance misses, muted guidance for its second half but an improving profit picture after self-help measures.
Asos said that for the period from June 1 to September 3, the final stretch of its financial year which it labels "P4", group revenue declined 12% annually.
The firm reported a "stronger start" to the P4 period, before its performance weakened in July and August on a "deterioration in the UK clothing market", driven by wet weather.
For the full-year, Asos expects to report that total group revenue fell 10%. Despite a declining sales in its P4 period, Asos still expects that stretch of its financial year to be profitable.
For the second half alone, meanwhile, it said its adjusted earnings before interest and tax more than doubled. It put this down to "material improvements to core profitability and strong inventory management".
It expects its second half Ebit at the bottom end of its guided GBP40 million and GBP60 million range, however. Its adjusted gross margin expanded by 150 basis points in the second half, shy of its 200 basis point growth prediction. In addition, it expects a second half free cash inflow of GBP60 million, excluding refinancing costs, missing its prediction of GBP150 million.
The underwhelming guidance, and the miss on gross margin and free cash flow were too much for analysts at Shore Capital Markets to overlook.
"There was considerable anticipation for the second half to deliver the company's FY23 guidance," the analysts said.
"Unfortunately, despite delivering GBP300 million of profit improvement and cost savings, the company fell short of meeting its own guidance."
The Shore analysts continued: "From our perspective, this business is undergoing significant restructuring and cost adjustments in order to secure its long-term viability. Asos has taken decisive actions to bolster its financial performance, including reducing its reliance on unprofitable brands, streamlining operations in less lucrative markets, and strategically targeting unprofitable customer segments. However, it is important to acknowledge that the focus on profitability may potentially hinder future sales growth."
Shore rates Asos at 'sell'.
At the other end of the spectrum, Berenberg, which rates Asos at 'buy', took heart from the update on Tuesday.
Asos said GBP300 million of profit improvement measures and cost savings have now been realised.
"The successful implementation of the driving change agenda has set Asos on the course to profitability in FY24 and has enhanced the strength of the underlying business, which in our view, is underappreciated by current valuation. As such, we reiterate our buy rating," analysts at Berenberg said.
Also on Tuesday, Asos said that its inventory fell 30% during the financial year. However, this came at the expense of its margin, as it had to turn to "higher levels of discounting in the short-term" in order to slim its inventory.
Asos cautioned that discounting may continue in the opening stretch of its new financial year.
Analysts at UBS said: "We think the weaker sales/lower free cash flow as well as slightly more cautious P1 commentary and that discounting may persist through FY24 is likely to make investors cautious."
UBS rates Asos at 'neutral'.
By Eric Cunha, Alliance News news editor
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