12th Apr 2022 15:35
(Alliance News) - Investors took confidence from Asos PLC reiterating annual guidance on Tuesday, though analysts noted the fast fashion retailer faces a less than stellar outlook.
Tumbling consumer confidence, rising bills, inflation and supply chain woes are likely to dampen the company's prospects going forward.
"Asos has gone from an operating profit to a loss, its margins are declining, and it has moved from a net cash to net debt position. That's not the direction of travel one would expect from the once online retail superstar," AJ Bell analyst Danni Hewson commented.
Asos said its revenue in the six months to February 28 inched up 1.4% to GBP2.00 billion from GBP1.98 billion a year prior. However, it swung to a pretax loss of GBP15.8 million from a GBP106.4 million profit.
"Asos has delivered an encouraging trading performance, against the continuing backdrop of significant volatility and disruption. The team has acted with determination and pace and is making good early progress on the strategic plan for the next phase of growth," Chief Financial and Operating Officer Mat Dunn said.
Looking ahead, the company left annual guidance unchanged, save for the contribution of its Russia unit in the second half.
The company added: "The exclusion of Russia is expected to reduce full year revenue growth by approximately 2%, adjusted pretax profit by GBP14 million and a working capital outflow associated with a rebalancing of stock. However, it is clear that the outlook has become less certain, and much will depend on how broader consumer discretionary spend evolves over the coming months. This uncertainty introduces a greater degree of risk to our performance than normal."
Asos shares were up 4.5% at 1,608.00 pence each in London on Tuesday afternoon. The stock was down 69% on 12 months earlier, however.
Interactive Investor analyst Victoria Scholar commented: "Investors have lost confidence in Asos...This marks a major turnaround from during the pandemic when it was a key beneficiary of demand for stay-at-home stocks. Since life has reopened and restrictions have ended, companies like ASOS, Deliveroo and Zoom have all struggled.
"The broader tech sell-off also dragged Asos lower amid concerns about what the prospect of higher interest rates could meet for some of the more debt-laden companies in the sector. On top of that, rising cost inflation for ASOS, a highly price-sensitive business, is eating away at margins as it is unable to materially increase its prices. All of this in combination with the global supply chain woes suggests that Asos could continue its downtrend."
Margins have come under pressure. The company's first half gross margin fell to 43.1% from 45.0%.
One way to boost margins and profit could centre on customer return rates, AJ Bell's Hewson added.
"The company has some difficult decisions to make if it wants to improve its profits. One area is to look at return rates. For years, customers have treated Asos and many other fast-fashion retailers as a two-stage transaction. Buy multiple sizes of the same items and send back the ones that don't fit. This is costing Asos a lot of money and the only way to discourage this activity is to start charging customers to return products. Although this action risks dampening demand, more retailers are going down this path and so it wouldn't be out of the ordinary."
Asos on Tuesday said returns rates have picked up recently but are not ahead of pre-virus levels.
By Eric Cunha; [email protected]
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