“There is a lag between operational change and visible results,” said online fashion retailer Asos in its half-year report, giving an optimistic spin on half-year numbers that were conspicuously awful.
While the new chief executive talks the management blah of optimising and rightsizing, an adjusted pre-tax loss of £87.4m was several degrees worse than the City had expected. The unadjusted version, which included a £129m stock write-down and various other whacks, was a loss of £291m, which is going some in the space of six months.
The shares plunged 23%, removing the last knockings of a new year rally that had been inspired by the thought that José Antonio Ramos Calamonte could perform a few quick fixes on a business that spent too many years chasing sales growth, especially overseas, without ever putting a robust operational model in place. The whoosh of extra demand during Covid lockdowns masked the flaws … until it didn’t.
Calamonte sounds a more nuts-and-bolts operator than his predecessors, which is presumably why he got the job. And after half a lap of the track, he is sticking to his target of £300m of cost savings this year. A strategy of less discounting and more concentration on selling items at full price also sounds entirely sensible.
The challenge, though, lies in believing that a return to what Calamonte called a “sustainable profit” can come as soon as the second half of its year. One question from the City is whether the “driving change” agenda is sufficiently radical. Another is how the novel sight of falling sales – revenues were down 8% in the half, despite inflation – will affect profit margins in the medium term.
Amid it all, one gets glimpses of how deep some issues run. The mini-revelation in the results statement was that “a small number of customers” are having “a disproportionately negative impact on Asos profitability”, to the tune of more than £100m.
How so? Well, it seems these customers buy heaps of discounted stock on buy-now-pay-later credit, try the clothes on and then return most of them, creating hassle and expense for Asos. The loss per order in this category is about £6. Since the “small number” represents 6% of a customer base of 25m – so 1.5 million people – that feels more like a big problem. Using “a more personalised approach to incentivise good behaviours”, whatever that means, also sounds a timid remedy.
Meanwhile, a little of the fizz has evaporated from the entire online fashion scene as shops have reopened. And one suspects the arrival of newer online players, such as Chinese firm Shein and the secondhand marketplaces Depop and Vinted, are becoming more than minor irritants.
Calamonte’s final problem is the balance sheet. On one hand, Asos secured an extension to its credit facility this month. On the other, net debt was £432m at the end of February and, even with expected cash inflows in the second half, the company’s prediction is for a bottom-of-the-range net outflow of £100m over the 12 months. “With free cashflow expectations reduced, we still see risk that in a plausible downside scenario, the group may need to raise further cash,” said Liberum’s analysts.
One can see why hopeful punters briefly alighted on Asos as a rebound candidate. This is still a business with £4bn-ish of annual revenues, that has been around two decades; and the share price, now just 487p, was £55 as recently as two years ago. But one can also understand why consensus thinking has reversed. Calamonte is attempting a major overhaul in unhelpful market conditions. Mind the lag. Fast fashion, slow recovery, is the way to bet.
