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Asos Sees Disappointing First Half as it Works to Improve Operations

British fashion e-tailer Asos swung to the red in the fourth quarter—mostly due to investments to improve operations—though kept full year guidance due to positive expectations from a new merchandise mix, improvements to enhance efficiencies, and growth in the U.S. market.

In a Nutshell: Nicholas Beighton, chief executive officer, told investors and analysts in a conference call Wednesday that the company can do some things better and is “taking action accordingly.”

The CEO said organic acquisition of customers was slower in the half, particularly with the younger demographic. And the average basket was lower, too, mostly due to promotional activity in the first quarter, as well as customers buying into lower price brands.

Asos is planning a more targeted direct marketing campaign at top music festivals across the U.S. this summer. In the second quarter, Beighton said the company has evolved its presentation to better engage its consumers, either a re-shop or restyle of the look, and has since “seen dramatic uplifts” in customer engagement.

Another big edit for Asos involved the third-party brands on its site.

“We continue to review and update our branded portfolio to ensure it remains exciting, relevant and engaging. Over the half, we’ve exited over 280 brand, and have 190 new ones,” Beighton said. The number exited was higher than normal, the CEO said, because the company thought some weren’t resonating with customers they way they should. The new merchandise mix that Asos is onboarding includes up and coming brands alongside some more established brands, like & Other Stories.

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Other efficiencies include the use of new software to improve processing efficiencies in taking back customers’ returns. So far, it has built seven processing centers, which in the aggregate can handle “around 3.5 million returns a week,” the company noted. Re-platforming the software will allow for between a 10 percent to 15 percent productivity improvement.

Asos has also noticed some customers choosing a different set of payment options. As Beighton noted, there’s been a surge in “buy now, pay later installment payment methods that are really compelling.” He told analysts that the company, which launched new payment options in the half, is “going to do a lot more on that because it’s resonating with the customer.”

When it comes to ethical consumption and how that might impact consumer demand, Beighton said the company’s private label Asos Design is about 36 percent of the total sales mix. The company takes care of the fabric sourcing for sustainability, as well as the appropriate wages for factory workers and plastic and paper recyclables for packaging. He also spoke briefly about new jeans Asos is set to launch comprised of 100 percent recycled material. Noting that denim, for an average pair of jeans, consumes 1,500 liters of water, the CEO said by “breaking down all the denim,” it can be recycled into new fabric.

While ethical consumption isn’t dominating demand yet, Beighton said a tipping point could be on the way. With social media, the “younger consumers are more connected, more aware of these things than ever before…I do not think they’ll pay more for it. They’ll expect brands to take care of it for them. And I think it’ll become a defining feature of how people consume their fashion…,” he said.

Sales: For the six months ended Feb. 28, sales at Asos rose 13.5 percent to 1.31 billion pounds ($1.71 billion) from 1.16 billion pounds ($1.51 billion)a year ago. The company said total orders placed for the first half were 34.4 million ($44.9 million), up 15 percent year-over-year.

Earnings: The company posted a net loss of 37.9 million pounds ($49.5 million), compared with net income of 37.7 million pounds ($49.2 million) a year ago.

Beighton told analysts the company was “confident of an improved performance in the second half” and that it was not changing its guidance for the year. Asos expects sales growth of 15 percent for the year.

CEO’s Take: Beighton said, noting the completion of certain initiatives connected with its Eurohub automation and the plans to engage the U.S. customer base, as well as the opening of a new facility in Atlanta: “These material supply chain investments will significantly [improve] our capability, our customer experience and our productivity. And these benefits are ahead of us and we’re now already in a great position to capture them….We have a strong efficient and localized operations now in three major markets [in] the U.K., Europe and U.S.”

The CEO also told analysts, “The addressable market for Asos in the global online 20-something fashion market continues to grow. The power of our fashion brand and the reach of our platform and the enhanced infrastructure and technology we’ve now build gives us confidence in our ability to capture that.”