Asos shares surge on return to profitability

Struggling UK online fashion retailer Asos said third-quarter sales fell 14%, but posted a rise in core earnings as it claimed its turnaround strategy to focus on more profitable items was starting to bear fruit.

Adjusted earnings before interest and tax (EBIT) rose more than £20m in the three months to May 31, with EBIT margin up 250 basis points. Asos maintained its forecast for second-half adjusted EBIT of £40 – 60m. Shares in the company surged by 10% in London trade.

Revenue for the period slipped to £858.9m from £964.1m, with the company citing “deliberate actions on capital allocation to improve profitability”.

Shares in the group have slumped 71% in the past year as the company deals with a reopening of physical retail chains after the Covid pandemic, a higher rate of product returns and fierce competition from Chinese rival Shein.

It has already said that sales slumped about 15% in March and April when it reported a first half loss and guided to a "low double digit" sales decline for the second half.

Chief executive José Antonio Ramos Calamonte last October unveiled an overhaul of its business model after a string of operational problems and runaway inflation hammered its profits.

“We continue to focus on making ASOS the best possible destination for our fashion-loving customers. At the same time, we are delivering on our plan to turn the business around: to right-size our stock; to generate cash; to reduce our net debt; and to structurally improve our profitability,” he said after the latest results.

“I am confident in the direction we are going, we have restored profitability in the period and made good progress in clearing through our inventory to generate cash.”

“We retain ample balance sheet flexibility and reiterate our expectations for improved profitability, cash generation and reduction in net debt in H2 FY23 and beyond.”

Aarin Chiekrie, equity analyst at Hargreaves Lansdown noted that costs were also being stripped, 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".

"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."

Reporting by Frank Prenesti for Sharecast.com