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April 12, 2022

Asos H1 earnings sink on supply chain challenges

UK online fashion Asos has reported an 87% drop in first-half adjusted earnings on the back of supply chain challenges, and has warned of further impact from inflation and the Russia-Ukraine war.

By Hannah Abdulla

In its interim trading statement for the six months (H1) to 28 February, Asos said stock levels had been heavily impacted by supply chain constraints and warned its full-year earnings goal is at risk from rising inflation and the disruption as a result of the Russia-Ukraine war.

  • Adjusted profit before tax fell 87% to GBP14.8m.
  • Asos booked an operating loss of GBP4.4m, versus a profit of GBP109.7m for the same period last year.
  • Group revenues rose 1% to GBP2bn. Revenues were up 4% in constant currency.

In its update today (12 April), Asos said it has delivered strong operational progress to date with its H2 stock position materially enhanced, driving increased newness and availability.

It also pointed to what it called “encouraging progress” on the implementation of the strategy outlined at the Capital Markets Day (CMD); centred on driving a more customer-centric organisation, accelerating pace of delivery across the commercial function, and increasing emphasis on data and digital product.

Save for the removal of Russia’s contribution to H2 following the decision to suspend sales announced on 2 March, guidance remains unchanged.

The retailer is, however, seeing greater risk in the second half than normal as the full impact of recent inflationary pressure on consumers and the potential impact on discretionary spend are yet to be felt.

Despite the external challenges, Asos anticipates sales growth to accelerate in H2 supported by:

  • Improved stock profile
  • Easing of comparative growth rates
  • Return of event and holiday-led demand
  • Increased marketing investment to support international sales acceleration
  • Improved lead times as supply chain constraints ease

COO and CFO at Dunn said: “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, as set out at our CMD last year. While much remains to be done, we have a clear plan for each of the three key pillars – our platform, consumer offer, and international expansion – and are already seeing positive signs of progress across the business. We’re confident of the benefits these efforts will create and our continued ability to deliver.

“We’ve entered the second half of the year well placed, and believe that our stock position, with increased product availability and newness, will stand us in good stead. We remain mindful of the potential impact on demand from the growing pressures on consumer spend and will continue to be responsive to any changes in market conditions as we progress the work started in the first half to deliver on our ambitions.”

Analyst reaction: Asos H1 growth deceleration “expected”

Pippa Stephens, retail analyst at GlobalData says: “Asos experienced a significant deceleration of growth in H1 FY2021/22, with group revenue rising by just GBP28.2m to GBP2,004.1m, compared to 25% constant currency growth in the prior year. However, this was to be expected, as the reopening of physical stores led to online demand becoming more muted compared to the peak of the pandemic. The ongoing global supply chain crisis notably impacted its performance, as longer lead times reduced stock availability, especially internationally, while also damaging the relevance of some ranges. Asos has also felt the pressure of increasing inflation, particularly in its freight and delivery costs, which took a toll on the retailer’s margins, contributing to an operating loss of GBP4.4m. With UK inflation rates expected to peak in April, consumers’ budgets will be squeezed further in H2, causing a downturn in discretionary spend. Despite these factors, Asos’ view for FY2021/22 remains unchanged, expecting growth of 10-15% with an acceleration anticipated in H2, due to heightened holiday-led demand and an improved stock position.

“The US continued to exhibit the strongest growth…followed by the UK, which saw constant currency sales increase by 8%, aided by the acquisition of 0.3m new customers. While the EU also saw minimal growth (1% in constant currency), the Rest of the World was its most problematic region, with constant currency revenues falling by 10%, constrained by stock availability issues, especially in Australia and Israel. The retailer is continuing to focus on growing internationally, launching in more Nordstrom stores in the US, as well as increasing the range of products available through the department store, with this expanding partnership helping it to build greater awareness in the country. Asos’ plans to roll out more marketing campaigns in test areas within the UK, US and France on platforms such as TikTok, YouTube and Snapchat will also help to drive its visibility further.

“In H1, Asos bolstered its delivery proposition by launching its Partner Fulfils pilot scheme with Adidas and Reebok, in which products are fulfilled from the brands’ own warehouses once they have sold out in Asos’ fulfilment centres, increasing product availability and improving customer experience. Since the end of the reporting period, the pilot has been expanded to include styles from Adidas and Reebok not currently stocked in Asos’ fulfilment centres, and by the end of FY2021/22, it plans to roll it out to select European countries and onboard additional brands, giving increased choice to shoppers. Conversely, returns rates have continued to rise in H1 and into H2, though have not yet exceeded pre-pandemic levels. This is due to consumers opting for more fashion-led items, rather than the loungewear they primarily purchased during the lockdowns, while cancelled Christmas parties also drove an influx of partywear returns. To help bring returns rates down, Asos should display products on more varied body shapes, either by shooting images on multiple models, or by making use of AR technology, so that shoppers have a better idea of how items will fit.”

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