ASOS Plc (ASC) Earnings Call Transcript

Good morning, everyone. It's Ian Dyson, Chairman of ASOS, joined in this meeting by our new CEO, Jose Ramos; and our COO and CFO, Mat Dunn. I am here to talk about the Board changes we announced this morning, and then I'm going to hand over to Mat and Jose, and they'll take you through the trading statement. I'm really delighted to announce Jose as our new CEO. Since he joined the business in early 2021, he's done a superb job as Chief Commercial Officer. He's driven our products and trading strategy globally, made huge changes to the commercial and trading function. He's also a key member of the executive team that built and presented the ASOS strategy at the CMD that we presented last November. He has a stellar fashion and retail CV, having worked at Inditex, Carrefour, Esprit and [ later ] as the CEO of Salsa Jeans. In short, the Board believes Jose is the perfect person to lead the delivery of the exciting plans we've laid out for the business. His deep fashion retail and e-commerce experience will also stand in good stead as we look to navigate through what looks like a difficult economic and consumer environment. Jose's going to take on the CEO role with immediate effect, with Mat continuing as COO and CFO. I'd like to take this opportunity to thank Mat for leading the company over the last 8 months. He really has done an excellent job in an increasingly challenging external environment. We've also announced today that Jorgen Lindemann will take over from me as Chair on the 1st of August. Given my already-long tenure on the Board, I was clear when I took over the Chair role last [ Autumn ] that I had three objectives, to work with Mat, Jose and the team to deliver against our plans, to appoint a new CEO, and having done that, to work with the Board to find my successor as Chair. Jorgen has made a big impact since joining the Board. His experience in digitally-led retail businesses positions us perfectly to work with Jose, the executive team and the Board to deliver against our plans. It's also a real positive to be able to have a seamless transition at Chair level, particularly in the current economic environment. Now, I'll take you to trading statement in a minute, but first, I'm just going to hand over to ask Jose to say a few words. Jose?

Thanks a lot, Ian, and good morning, everyone. I am really delighted to be with you on this call this morning. ASOS is, without a doubt, a very special company. And I am really, really excited to have the opportunity to devote all my energy and passion as CEO to turns ASOS into the global destination for fashion [indiscernible]. I have spent 18 years in this industry, working in different companies all over Europe, from Spain to Germany and Portugal and, of course, here in the U.K. With the perspective of these years, I can say that I've always been impressed by the strong fundamental of ASOS. The fashion credibility of our brands, our capacity to stand out in conjunction with the most relevant international names in the industry and our differentiated regional language that creates a unique connection with fashion [indiscernible] things. I am convinced and have a great opportunity to continue building a winning business formula upon these solid pillars in the coming years. Before I hand over to Mat to talk through on our recent results, I would like to highlight three important messages from my perspective. First, I would like to emphasize the strong operational and strategic process we have shown in the last months. Good examples of this progress are the evolution of sales of our brands, the successful integration of Topshop and the setup of our partnership with Nordstrom. This positive progress has shown in the sales evolution in most of our geographies in this quarter. The acceleration of our gross sales shows the increasing quality of our value proposition for consumers. However, this positive evolution has been at least partly offset by the impact of inflation on consumer behavior. This has had some impact on demand, for sure, but more significantly, the [ sharp ] jump in return rates we have seen has had a disproportionate effect on profitability. These [ short-term ] challenges are something we need to navigate in the coming months. Still, I firmly believe in the solid fundamentals of our business, as I mentioned before, in our long-term potential and our ability to capture our fair share of the GBP 430 billion total fashion, [ it'll be ] 20-something market opportunity. And I'll now hand over to Mat.

Thanks, Jose, and good morning, everybody. Before I start, and consistent with the approach taken at P1 and H1, all sales numbers closed throughout the call are on a constant currency basis and reflects total sales growth. In addition, all the gross numbers we quote exclude Russia from the base, following our decision to suspend sales for the country on the second of March. We have also quoted performance [ increases ] in Russia in the base period in our RNS to assist with reconciling numbers on your side and for [ alliance ] in the full-year guidance. We delivered 4% revenue growth in P3, which comprises March, April and May, against the prior-year comparative growth rate of 47%. The U.K. grew by 4% against an incredibly strong prior-year comparative of 85%, whilst we delivered a continued acceleration in the U.S. to 15%, hurdling a 40% growth rate in 2021. Europe declined by 2%, which is behind our expectations, and our Rest of World segment declined by 9%. At our half-year results, we set out the [indiscernible] we have taken as we face into a more challenging operating environment and specifically the work we have done to improve our stock profile and drive increased newness and availability in the face of the global supply chain challenges during the first [ half ]. This, combined with an increase in event-led demand linked to the return of weddings, holidays, events and festivals has driven an acceleration in gross sales in P3. At the same time, in the half-year results, we called out two key H2 uncertainties, the impact of inflation on consumer discretion we spend and the impact of geopolitical risk on consumer sentiment. We knew that P3 would give us valuable insight into the impact of these on consumers. And with 3 months of gross sales and 2 months of actual returns in March and April now available, we are now able to update you with more clarity on what this will mean for our guidance for the balance of the year. Whilst we have seen an acceleration in gross sales, as I have mentioned, this has been partially offset by significantly increased returns rates in April, which we have seen as we got the returns back in May. In order to understand this change in April, we've worked to isolate all the known impacts, including country mix, payment mix and product mix, and we are still left with a sharp underlying increase from March to April. Given the timing and the extent of the change in behavior, we believe that this clearly shows that inflationary pressure is being felt by our customers and impacting their [ partner ] spending. The way they shop may adjust over time, but we are taking swift and decisive steps to minimize the impact. It's been encouraging to end the period with 10% sales growth, even after incorporating a similar return to expectation for May as we have seen in April, with improvement across all key territories. This is supportive of the sales growth that we expect to see in the balance of the year. Furthermore, we have also seen robust market share performance within our key territories, which reflects the continued attractiveness of our customer offer. Moving on from sales to gross margin. Let me now cover the factors, which has led to a 310 basis point decline. As anticipated, we saw sustained levels of promo activity in the market and higher freight costs as although the rates we have locked in are favorable to the market, they are yet higher year-on-year. Gross margin has also been affected by product mix. Some casual wear categories have been more resilient than expected. Whilst we are clearly navigating significant levels of short-term uncertainty, we remain focused on ensuring we maximize our long-term potential by progressing the building blocks we laid out at the Capital Markets Day back in November. We'll give a much fuller update in our year-end results. But before I hand over to Jose to talk through our commercial performance, we have some key areas of strategic process in the quarter that we'd like to share with you today. First up, we have further expanded our Partner Fulfills offer, adding additional width to the assortment of stock available ahead of our plans. This has been done in support of key product launches with Adidas, namely the [ February ] launch of the [ IVY PARK ] collection as well as the new Spring/Summer '22 collection, which includes 250 additional styles. We have further U.K. width expansion signed this month with just under 500 additional new styles planned, and we are also on track to roll out Partner Fulfills to both Europe and new brand partners by the end of FY '22. We have also grown our Premier customer base by a further 19%. This is extremely important to us as it means that we convert our customers into more engaged shoppers, driving increase in frequency, average customer value and conversion. I'll now hand over to Jose to talk you through our progress against the commercial pillars of our strategy before taking you through some more detail on territory performance.

Thank you, Mat. We shared with you back in October, our ambition to double down on our fashion offering, and to add 1 billion of sales for own brands in the medium term. I am pleased to share with you that we have started to experience a significant growth of our core brand, ASOS Design, especially in the last 8 to 12 weeks, resulting in a 5% average growth over the course of the last quarter. This trend is even more remarkable if we look at the part of our assortment more focused on occasional [indiscernible] dressing by [indiscernible] where we have observed a growth beyond 80%. In the same direction, Topshop has shown a very positive evolution. We are now more than a year on from the Topshop acquisition, and P3 is our first quarter where we have largely a like-for-like comparison. From a set perspective, we're pleased with our continued performance, and we have delivered 70% growth, primarily in the U.S., U.K. and Germany. Again, underpinning the strength of the Topshop brand in these key territories. We spoke to you at half year about our plans for the second half. I can confirm we have increased the amount of newness we're bringing to the market with up to 350 new style drops per week, and we have also accelerated our speed to market with 70% of Topshop created on short lead time, up from 65%, and 60% of top line, up from 40s. I would also like to highlight an important moment for ASOS. For the first time in history, ASOS has gone physical. In the month of February, we have launched ASOS [indiscernible] Nordstrom, an immersive shopping experience in the The Grove in L.A., an experience, we have rolled out to 11 additional stores, including New York, Chicago, Dallas and San Diego, in the month of May and an expanding assortment available on nordstrom.com. Through this launch, we dropped more than 230 styles across summer holiday dressing, [ suit ], party and evening wear as well as many casual and of leisure for both men and women, creating a unique opportunity for American consumers to get to know and to experience ASOS in a different way. Our [indiscernible] have been very popular with almost 650 [indiscernible] sold in the first 2 weeks in LA, [ The Grove ]. Before I turn to our performance by territory, let me give you my perspective on the recent changes we've seen in consumer behavior, particularly returns. I reiterate last point that given returns are specifically linked to our [ Nordstrom ] -- specifically linked to any specific brand, products or payment type, we believe they are driven by the inflationary pressures on our consumer disposable income. We also know that the sharp increase in return rates during the period happened at the same time that consumers started to feel the pinch. For example, in the U.K. we saw a sharp increase in return rates, consigning with increases in national insurance contributions and increased energy, food and fuel prices. We have a short period of data available. At this moment, it's difficult to say whether this is just an initial knee-jerk reaction to changing conditions or whether it could last longer. In any case, I take great confidence from the accelerations we have seen in our gross sales over the periods. We view this as a good indication of the attractiveness and competitiveness of our offer, as it shows the fact that our market share remains robust across our key territories. To tell the situation from a territory perspective, we can observe different performances. The U.K. grew at 4% as consumers shopped into occasion wear and holiday products, driven by the return of weddings and also holidays. This drove strong gross sales performance, which accelerated through the period. However, we saw a significant increase in return rates, which offset some of the growth at a gross sales level, and that coincides when consumers in the U.K. saw increases in national insurance contributions and increased energy food and fuel prices, as we explained before. On the other hand, the U.S. continued to outperform the growth with a strong shift back into occasion wear. One year on, the Topshop brands also continue to drive growth through both the ASOS website and the wholesale relationship with Nordstrom. ASOS has grown its market share in the U.S., and strong Premier penetration has supported an increase in consumer engagement. Unfortunately, EU declined 2% versus last year as returns rates in some countries have trended to above pre-pandemic levels as inflationary pressure on the associated consumer uncertainty have likely impacted consumer behavior. Consumer demand for going out wear has significantly increased, and we have also seen consumers increase their usage of buy-now, pay-later payment methods. Rest of the World was down 9%. However, pleasingly, we saw Australia return to growth, supported by improved delivery propositions, a reactivation of Premier and a successful targeting of local moments such as Click Frenzy. And I'll now move over to Mat, who will talk you through the outlook.

Thanks, Jose. In determining this outlook, there are a number of factors that we have considered, which I will lay out to you today to help contextualize the assumptions we've taken at both the bottom and the top end of our range. Given the level of volatility, we have necessarily provided quite a wide range of outcomes. Against the current backdrop of heightened consumer uncertainty and significantly higher level of returns, we now expect sales to be in the range of 4% to 7%. This implies an acceleration in the second half when excluding the impact of Russia and is consistent with our exit rate of 10% in May and weaker comparatives in P4. In terms of profitability, the net sales impact to low without taking any of the cost impacts of increased uncertainty [indiscernible], would probably have led to a circa GBP 40 million reduction in PBT, taking the range down to around GBP 60 million to GBP 90 million. However, the magnitude and shape of returns has clearly a major impact on our profitability as it's the least profitable way for consumer uncertainty to manifest itself. As a result, we have revised our expected adjusted PBT for FY '22 to a range of GBP 20 million to GBP 60 million. For those of you who think in EBITDA, this equates to just over a 4% EBITDA margin even at the bottom end of the range. To help conceptualize our revised range, I'm going to talk you through the assumptions we have made. At the bottom end of the range, we have assumed a continuation of April returns levels for the balance of the year. And we have also allowed some room for a weakening in gross sales, given the pressure on consumer. At the upper end of the range, we are projecting a continuation of May's demand trends against softer comps, but with consumers also adjusting their buying behaviors and a resultant improvement in returns from April levels. Along with the impact of higher returns on warehousing and delivery costs, our updated guidance also takes into account both increased markdown and labor inefficiency, resulting from the higher levels of returned stock. To partially mitigate these impacts, both now and into the future, we have taken a number of swift and decisive measures. These include taking some additional pricing actions on higher-return categories, refining our customer offer to incentivize lower levels of returns, reducing our investment level somewhat and looking to minimize discretionary spend wherever possible. Obviously, as the pattern of behavior becomes clearer, we will consider further action as appropriate. It's clearly too early to discuss any of the further options as we are still only talking about 1 month of actual behavior. But as you all know, we have a highly variable and flexible business model and have multiple levers to pull to adjust profitability over the short to medium term. From a cash flow perspective, this profit impact combined with an investment in working capital, will result in net debt being in the range of GBP 75 million to GBP 125 million. This investment in working capital arises from the return profile in part as well as bringing in autumn/winter stock earlier than last year in line with normal levels of build for peak as the supply chain challenges normalize. And so to summarize, while the short-term [indiscernible] remains challenging, we strengthened our position with good operational and strategic progress made over the period. And as Jose said at the start of the call, we firmly believe we are well positioned to capture our fair share of the GBP 430 billion total addressable market opportunity. We'll now hand over to questions.

[Operator Instructions] And our first question comes from Anne Critchlow at Societe Generale.

It's on returns rates. So I'm just wondering how many percentage points above the pre-pandemic-level returns rates are now on average? And which countries have seen them go up the most? I mean, I'm guessing it's U.K. and Germany. And also, please, could you remind us how the returns rates have stayed over previous quarters, just so we can understand when the comps get easier?

Anne, it's Mat. Let me answer that question. So in terms of return rates versus creep, I mean, again, it's important to say it's -- we've seen very different behavior in April. And so what I'm going to comment on is what April returns rates would look like rather than being able to -- being able to extrapolate for the year because, obviously, we still need to see that play out. But in terms of April returns rate, relative to pre-pandemic levels, they would be around -- probably at this point, around 150 to 200 basis points higher than pre-pandemic levels if you took a -- normalized for all the factors I spoke about before. So that's where they would be sitting. In terms of the country mix, actually, we've seen biggest increases in Northern Europe, less so in Germany. And we have seen some movement in [indiscernible] in the U.K. So those have been the big areas, but we have seen increased returns rates across every geography. So this is a feature we're seeing across all of our consumer base. In terms of the phasing of returns rates, again, they'll vary by much, depending on what we're doing. But I think what we've assumed for the balance of the year is that -- at the bottom end of the range that, that behavior in April continues relative to the normal level of returns rates that we would see. So that's kind of how we factored into the guidance.

Our next question comes from Simon Irwin at Credit Suisse.

A couple of questions. The first one is to Jose, which is how committed are you to the strategy that was announced in whenever we are, kind of October, November last year, from your perspective? And I guess also that presumably includes the kind of slightly newer look at the Board. And secondly, can you just talk a little bit more about kind of elements that you've discussed around profit protection in particular, whether you're thinking about [ paid-for ] returns or other methods of getting these levels down?

Well, as you know, I was a very active part -- element of the strategy that we presented in October, November. I already forgot when. And I am totally committed to this strategy. I think this strategy was built on the solid pillar that I mentioned before and is going in the right direction. Obviously, we have to be flexible in the sense that how are we going to navigate this travel [indiscernible] that we see that are coming right now. And I would say that this is pretty much in the core of this industry that we always have to be ready to react. But the pillars and the strategy are completely right, and we are still committed to it. In terms of the second question, you...

So maybe we can come back -- we can come back up again. So Simon, in terms of your question on returns mitigation options, I think it's important to remember, it's 1 month of returns. And as I alluded to on the call, we have taken a number of, I guess, what we call no-regrets decisions that we think will optimize our customer proposition. We still believe that free returns are a core part of our offer. And therefore, some of the other measures at this stage are not necessarily things we would consider. But as I also alluded to, there are lots of other things we could do if the behavior is sustained. But I think the important thing is that we don't need [indiscernible]. I'm sure, between Jose and I, will be a very active discussion over the coming months.

Our next question comes from Georgina Johanan at JPMorgan.

I've got two, please. The first one was just around -- you referenced that you're seeing elevated promo activity or sustained levels of promo activity in the market at the moment. Can you just give some geographical color on that, please? Because I think there have obviously been other retailers that have reported where sales have come in much better than expectations. And indeed, sort of, the closing market looks to be fairly solid in some geographies. So just some color on that would be helpful, please. And then finally, just given the new guidance, could you just remind us where that leaves you in terms of headroom at your end, please, on cash?

Sure. Do you want to talk about promo levels, Jose, and then I can talk about headroom?

So thanks for your question. I think in terms of promo activity, what we're seeing is pretty much even evolution in all our geographies. We are not seeing a different -- a significantly different performance or behavior of consumers in different geographies. Obviously, online is -- it has a certain level of promotions. That's not new. And we are not seeing a different approach or a different behavior of consumers in the U.K. or in Continental Europe or in the U.S. It's pretty much the same.

And in terms of headroom, Georgi, so we have 850 million of available facilities. We've got the convertible, which matures in '26 and then we have an RCS -- is out till '24. So that's like the headroom. The conveys without covenants and the RCS has kind of industry-standard covenants on it. So again, we feel very comfortable with the level of headroom that we'll have available to us at year end.

Our next question comes from Michael Benedict at Berenberg.

I have a couple, please. First one is around how you expect the promotional environment to evolve as we move into FY '23? I assume retailers are pulling back on their stockpile. So any color there would be helpful. And then secondly, U.S. performance was relatively strong in the quarter. I wondered if you could give color around that. Is that the impact of the marketing investment coming through or wholesale support? Yes, any color would be great.

In terms of the, let's say, outlook of the promotional environment, I guess there are quite a few things that may come to place. We are, obviously -- one is what's going to be the stock level of the different brands or retailers. And brands that are in difficulty with stock levels, might become more aggressive. But beyond that, we are not really expecting a massive change in the current evolution of the role that promotions are playing, and we are not planning to change how we use promotions or [indiscernible] or anything like that. So in that sense, I would say, unless there are big changes in the top levels of different players, things would remain as they are.

I think the only thing I'd build on is, obviously, for us, at the start of last year, we did have quite high levels of markdown as we exited the year because of the challenges of last summer. Based on our current projections and the markdown, et cetera, that we've committed to this year, you would expect [ newer ] for us to exit the year with a significantly more rightsized stock profile. So I guess it's hardly typical to know what everyone else is going to do. But I think in terms of our stock held and stock quality year-on-year, we'd expect to enter next year with a significantly improved stock health position.

So in terms of the U.S. performance, well as you have seen, we have seen a very strong performance. The strong performance is coming from different sources. Obviously, we have the partnership with Nordstrom that I mentioned, even though it's very early days. We have seen a very strong performance of Topshop in the U.S., which is very pleasing, and we are seeing our operations in the U.S. also performing well. So we are very positive that sense with the American markets. I don't know if you want to [add to that ] Mat, or...

No. I guess the other -- the only point I'd note is that obviously, our own brands have a high percentage of the U.S. business and now some of the others. And then for some of the progress Jose spoke about in terms of ASOS, et cetera, would obviously be more beneficial in the U.S., just given the higher mix.

Our next question comes from Miriam Adisa at Morgan Stanley.

First question just on customer behavior. Just wondering if you could give a bit more color on what you're seeing there aside from returns? I mean, are you seeing any trading down or people adding less items per basket and if there's any variation by region? And then secondly, just on the marketing spend, could you talk a bit about what's baked into your guidance, particularly thinking about how this sits in to your -- the midterm plan for the increase in marketing in the U.S. and the marketing in Europe? And then finally, if you could just comment on your CapEx guidance and what that is now?

Let me pick those up then quickly. So in terms of CapEx, CapEx guidance is unchanged, hence why it's not referenced in the statement. In terms of marketing spend, as I mentioned, we have looked at our investment levels relative to current consumer environment. Therefore, I would anticipate that whilst you will still see an increase in marketing as a percent of sales year-on-year, it's probably not going to be the full 100 basis points that we initially anticipated at the start of the year. We've always said that we will be -- we will adapt, based on the market circumstances. And therefore, I think we're kind of taking a balanced approach for the rest of the year. In terms of broader color on customer behavior, we've seen, I guess, two notable features. We've seen good basket values. We've seen very robust basket values. And I think that Jose mentioned, that reflects the quality of the offer and the fact that really people are buying into the fashionability of the product. And obviously, within that, dresses, for example, which has performed really well, has higher ASP. So I think in terms of those metrics, we're actually seeing really positive customer evolution. And the other thing we're seeing is a kind of mix into our -- as we cycle really tough -- new customer [ comps, i think, are mixing into ] our existing customer base. But what's really pleasing is, we're seeing improvements in frequency alongside those basket values. So I think -- overall, I think we're really pleased with the way customers are buying into our proposition. Obviously, as they feel the squeeze, it feels like -- on balance, they're choosing to return at this time, marginally more. Obviously, that may adjust into a different buying pattern into gross sales or into return. It's too early for us to tell, and that's kind of what we build into the guidance, is that -- I think working hypothesis is probably the behavior will start to improve. But over what timeframe and to what extent is still unknown. And that is very much our view. That's not -- obviously, we need to wait and see what happens. And hence what we've provided is such a wide range of guidance.