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Asos CEO Says Customers Are ‘Returning to Physical Stores’

Debt is up and revenue is down at Asos.

The British e-tailer posted a first half revenue decline plus a significantly wider loss for the six months ended Feb. 28. Gross margin fell in the quarter while net debt piled up. The company implemented a Driving Change agenda in December to stimulate sustainable profits.

Asos believes it can return to profitability in the second half as it continues implementing a new business model. The company also amended its revolving credit facility. The Asos board believes the company has “sufficient resources to continue” operating for the next 12 months.

In a Nutshell: Asos is continuing to cut inventory by 20 percent, rejigger buying and merchandising and streamline its logistics network. It believes it can achieve more profitable full-price sales by cutting back on markdowns and enhancing product relevance.

Asos stopped carrying 35 unprofitable brands, eliminated free standard delivery in five non-core European countries and tweaked U.S. delivery prices.

“Current product lead times mean there is a lag between operational change and visible results,” CEO José Antonio Ramos Calamonte said in his first half review. “We are making these changes at the same time as our customers are feeling the squeeze financially and in the short-term are returning to physical stores post-pandemic.”

Asos’ implementation of the new model in the middle of the Spring-Summer 2023 buying cycle is expected to weigh on current sales trends. The e-tailer is running a test-and-react pilot for its private brands using U.K. suppliers on select product lines to try to reduce lead times from concept to store to two weeks, Calamonte said. Its Premier customer base shrank 7 percent year-over-year as Asos hiked subscription prices and introduced or increased minimum order values.

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“The Company reduced its investment in customer acquisition as it prioritised optimisation of existing customer profitability at a time of low growth, with marketing spend declining 8 percent year-over-year,” Calamonte said. Asos is still looking for a permanent chief financial officer and other key strategic hires.

Departing interim CFO Katy Mecklenburgh—who will be succeeded by interim CFO Sean Glithero—said the gross margin for the half was 36.1 percent. First-half operating expenses reflected higher warehouse wages, third-party technology services and insurance expenses, and overhead costs.

Net debt of 431.7 million pounds ($545 million) was driven by a reported EBITDA (earnings before interest, taxes, depreciation and amortization) loss of 189.2 million pounds ($238.8 million), while capital expenditure investment was weighted towards the first half. Net debt a year ago was 62.6 million pounds ($78.5 million).

In the half, the British e-tailer partnered with GoodWeave International and onboarded three strategic apparel and accessories suppliers in India. The nonprofit works to eradicate child, forced and bonded labor in international supply chains.

Net Sales: Revenue for the half fell 8.2 percent to 1.84 billion pounds ($2.32 billion) from 2 billion pounds ($2.53 billion) in the year-ago period.

Asos said January and February sales reflected fewer markdowns and other changes to raise profits, as well as a tighter assortment to right-size inventory. Online sales fell in the half, but came in above pre-pandemic numbers. U.K. sales were down 10 percent, Europe was flat, U.S. was down 7 percent and rest of the world was down 12 percent.

Earnings: Asos posted a wider pre-tax loss of 290.9 million pounds ($367.2 million) versus the pre-tax loss of 15.8 million pounds ($19.9 million) a year ago.

On an adjusted basis, the pre-tax loss was 87.4 million pounds ($110.3 million), against a pre-tax profit of 14.8 million pounds ($18.7 million) a year ago.

CEO’s Take: “Our focus is on improving our core profitability, prioritising order economics over top-line growth and I am pleased with the strategic and rapid operational progress the business has made in the first half of the financial year, against some very challenging trading conditions,” Calamonte said. “While some of these changes have impacted short-term sales growth, there are many causes for optimism as we progress through the second half of the year. We are improving our gross margin run rate in the face of significant headwinds, are starting to see the benefits of a repositioned stock profile, and are taking action to reduce the proportion of our sales which are not profitable.”