Asos Earnings: Revenue and Profits Decline as Investments Scaled Back

We expect to lower our fair value estimate for no-moat Asos ASC by a low-teens percentage as the company reported disappointing revenue and profits for the first half of the fiscal year ending in August 2023. We still view shares as cheap at current levels.

Revenue was down 10% at constant currencies as the company focused on cost containment and profitability and scaled back on business investments. For instance, markdowns were reduced, minimum order values increased or introduced in several territories, and marketing spending was curtailed (down 8%, stable at 6% of sales). The company was also working on streamlining the assortment and exit of unprofitable categories. While profitability focus is rational in a tougher consumer backdrop, we are wondering if reduced customer offering investments would weigh on growth and competitive position in the future.

Sales weakness was broad-based, with a 10% decline of revenue in the U.K., 7% decline in the U.S., 12% decline in the rest of the world, and flat performance in Europe. Despite cost-containment measures, inflationary pressures and operating deleverage ate into the company’s bottom line, driving it to a GBP 69.4 million adjusted EBIT loss. For the full year, the company expects free cash outflow of around GBP 100 million (at the lower end of the prior forecast). With cash and undrawn facilities in excess of GBP 400, we don’t see significant liquidity risk for the company.