Liberum sees 'significant execution risk' at Asos

In a detailed fourth-quarter trading update, the online retailer said that adjusted like-for-like sales were down 15% in the three months to 3 September, slightly worse than the 14% decline seen in the third quarter. Adjusted gross margins for the second half as a whole are to rise less than expected due to the investment in promotional activity to reduce inventory levels.

As a result, "EBIT is expected around the bottom of the guided £40m to £60m range, with free cash inflow in H2 now expected to be c.£60m excluding refinancing costs (previously £150m)", the company said.

"Credit to the management for delivering on the 'Driving Change Agenda' so far, but we fear top line could remain under pressure next year throughout next year, which could lead to further gross margin pressure for longer as the company focuses on reducing inventory," said Liberum analyst Anubhav Malhotra.

Malhotra said that the risk surrounding Asos's balance sheet remains, with a £500m convertible bond repayment due in April 2026 – which will be "dependent on further execution of the agenda next year".

According to Liberum's estimates, the stock trades at a forward enterprise value-to-sales ratio of 0.33, and an EV-to-EBITDA ratio of 5.8.

While these metrics "appear cheap", according to Malhotra, they also "reflect the significant execution risk associated with the strategy and the unresolved balance sheet concerns".

The broker has a 360p target price for the stock, which was down 1.3% at 381.91p by 1009 BST.