ASOS – Profits Return Despite Falling Revenues

ASOS plc (LON:ASC)’s third-quarter revenue fell 14% to £858.9m, ignoring the effect of exchange rates, reflecting declines across all geographies

There was a return to profitability this quarter, with a £20m swing in underlying operating profit, despite the fall in revenue.

Active customers fell by 0.8m to 24.1m in the quarter, reflecting a focus on profitable sales rather than growth. Around £200m of cost savings have been realized year-to-date, with the group saying it’s on track to reach its full-year target of around £300m.

As previously announced, ASOS raised around £80m of funds by issuing new equity shares, as well as refinanced £275m worth of debt, which have both helped to strengthen the balance sheet.

Full-year guidance has been maintained, with sales expected to decline by a low double-digit percentage and underlying operating profit anticipated to land in the £40-60m range.

The shares jumped up 15.5% following the announcement.

ASOS’s Earnings

“ASOS’ top line continues to fall as the group prioritizes profitability over growth. The plan to improve profitability involves removing unprofitable brands from the platform and re-evaluating the shipping and returns offer.

Costs are also getting stripped back, with the majority of the £200m cost savings achieved this year being structural, which should provide long-lasting relief to the headwinds that have inflated the group’s cost base. Investors reacted positively to today’s announcement and the shares jumped up by double-digits on the news.

The drive to right-size the disproportionately large level of inventory is making progress. There’s still work to be done on this front, but getting this excess stock off the books will provide some tailwinds to margins moving forwards. Full-year guidance has been maintained and the recent cash injection from the equity raise provides some breathing space to navigate any choppy waters ahead, but brings with it additional pressure to turn the group’s fortunes around.”

Article by Aarin Chiekrie, equity analyst at Hargreaves Lansdown

Source valuewalk