ASOS Earnings: Continues to Disappoint Despite Reasonable Efforts; Shares Cheap

We are reducing our fair value estimate for no-moat ASOS ASC from GBX 1910 to GBX 1330 as the company reported worsening trading conditions in the second half of the year and guided for further negative sales development in 2024. We still believe there is value in ASOS’ shares despite very high uncertainty. Those are trading at around 0.2 times revenue, implying continued erosion in revenue and profitability. That said, Zalando remains our preferred name in European online apparel space on bigger scale and stronger financials.

We believe ASOS is taking action to improve the performance, which is challenging (11% decline in adjusted group revenue on annual basis, reported and adjusted losses). For instance, inventory has been reduced by almost 30%, supporting cash generation and bringing inventory days to 142 from 177 in 2022. However, more clearance is needed in the coming year, which would continue to pressure profitability. Narrower, more focused inventory ranges and faster supply chain should help drive full-price sales going forward, with some initial successes, but too little so far to move the needle. Focus on more profitable, larger orders should support business’ long-term structural profitability, while weighing on sales near term. We have previously raised concerns about reduction in marketing spending that could limit long-term growth potential (marketing expense declined to 5.5% from 5.7% of revenue in 2023 and was 13% lower in absolute terms). In that sense we support management’s decision to boost marketing spending by GBP 30 million. Management’s guidance for 5%- 15% revenue decline in fiscal 2024 without plans to exit any markets seems steep. We would advocate for exiting some of international markets, where ASOS’ delivery proposition is uncompetitive due to lack of local warehouses.