After a tough golden quarter, can Asos reclaim its crown?

The most recent golden quarter came as something of a pleasant surprise to the market. Across the retail sector, companies rejoiced as sales bounced back in the first Christmas period that was not disrupted by virus variants. Of course, the period was not without its tribulations. Businesses were still hit by delivery woes and rail strikes, but even in the face of this, many persevered. That’s why it may have come as a surprise to see Asos post less than ideal results this past quarter. Asos was once deemed one of the strongest performers online. “You go back a few years, and it was seen as the golden child of retail,” says Charlie Huggins, a retail analyst and head of Equities at Wealth Club. “Every quarter of every year, you could expect it to come out with strong results.” More recently, however, the company has struggled, with investors beginning to lose faith in the group. Asos failed to capitalise on the past festive season as revenues for the four months ended 31 December fell by 3%, with UK sales down by 8%. In contrast, rivals such as Next, JD Sports, Very Group, In The Style and more all posted a rise in sales, with Next even raising its FY profit guidance by £20m in light of strong Christmas trading. So what, exactly, has gone wrong with Asos? “There are a few reasons for these results, some of them in Asos’ control, and others, less so,” says Huggins. One of the main reasons is the group’s growing competition in the market, which Huggins believes has “finally caught up to them”. He says: “Asos was once a pioneer in online clothes retailing. However, we've seen, especially since the pandemic, many retailers improve their online propositions because they've realised that they don't have a choice. Even traditional retailers such as M&S have invested so much more into their online operations. Has this hurt Asos? Absolutely.” External factors are not the only issue at play, however. “At the same time, there have been internal issues as well,” says Huggins. “In terms of operations, Asos has spread themselves too thinly, for example.” He notes that instead of focusing on the UK, their overseas expansion to the likes of the US, France and Germany were not the success stories Asos may have hoped for. “The US market has historically been a very hard nut to crack for a lot of retailers, and in general, just because a business does well in the UK, it does not mean that it will do well overseas.” He continues: “By chasing overseas growth, Asos has brought unnecessary complexity to the business. It's brought distractions, it's brought cost, it’s brought hurdles. These things aren’t free. Pursuing overseas growth may look great on a PowerPoint chart but in reality it's very hard to pull off and can often come at the cost of domestic operations, leading a business to take its eye off the ball back home.” Perhaps Asos’ biggest setback, however, comes from its approach to returns policies. Asos does not currently charge for returns, unlike competitors such as Boohoo, who introduced a returns fee last year to help offset shipping costs. Huggins warns that Asos may have to follow suit if it is to improve its margins going forward. “Returns are an incredibly costly thing to deal with”, says Huggins. “This is the reason why even a business like Amazon hasn't made great moves into online fashion, because it's a big obstacle. If you think of Asos’ business model, they are serving a young demographic of 20-somethings and serving them entirely online. It would be fine if no one returned anything, but these kinds of customers are ordering lots of items, keeping the one that fits and sending the rest back. Those costs add up for Asos.” He adds: “And if you compare Asos with Next, for example, Next customers have the ability to return items in-store. That's a much more efficient way for them to deal with returns, and unfortunately Asos doesn't have that luxury, so dealing with online returns is ultimately a very costly exercise and one that should be reevaluated.” Driving Change Under the helm of new CEO José Antonio Ramos Calamonte, Asos recently confirmed plans to reevaluate its business model and cut costs through the launch of its Driving Change agenda. Asos’ cost-cutting plan is ambitious, to say the least, with the group targeting around £300m in cost savings as part of efforts to raise margins. “Asos has a huge task ahead in terms of exploring ways to raise profitability, and their turnaround plan will undoubtedly be wide-ranging”, says Huggins. As part of its strategy, Huggins believes Asos may potentially exit international regions and refocus on its core markets. “Asos failed to achieve any meaningful scale in the likes of the US and France and Germany, so they will take a very hard look at those countries and see if there is a way for them to operate with a higher margin business model in these areas”, he says. “It remains to be seen if they will exit these markets completely, but it would not surprise me if we see that in the future.” With its business model now under the microscope, Asos will have to decide where it can make the most effective cutbacks. “I believe that a lot of marketing spend will be under scrutiny in particular,” says Huggins. “Do they need to spend quite so much on customer acquisition, for example? It’s no good spending great amounts of money to acquire customers and then find that you're not making money from them.” According to Huggins, Asos may also consider raising its returns thresholds, meaning customers could have to order a certain amount before they are allowed free returns. “I’m sure the whole delivery and returns structure will be looked at,” he says. Indeed, just this week, Asos has raised the spending threshold for Asos Premier customers to receive free next-day delivery, with the minimum spend rising from £10 to £15, perhaps an early sign of a crackdown in its spending in this area. A change of leadership may also be an advantage to Asos at this time, Huggins believes. “The new CEO will definitely help push this new vision, but the culture changes go further than that. There are lots of new people within the business to help drive cultural change and get away from this mindset of ‘growth at all costs’.” Just this week, Sky reported Asos hired Scott Millar, a senior restructuring executive, to help strengthen its financial position and further its turnaround plan, for example. “There is much to be done. It’s not just one thing, or a simple thing. A change of people will help bring fresh impetus to this.” Can Asos turn it around? The results of Driving Change are yet to be seen, though in its latest trading update, Asos said it has already made “significant” progress against the plan. In the same update, CEO José Antonio Ramos Calamonte noted the group’s focus was shifting from “prioritising top-line growth to building a more relevant and competitive fashion business with a disciplined approach to capital allocation and ROI”, whilst “reinforcing our credibility as a leading destination for our fashion-loving customers”. “Some changes may be quicker than others,” says Huggins. “A lot of the cost cutting benefits should materialise over the next year or so however. It is sometimes easier to get rid of things when you're overspending in certain areas, and it’s almost easier to correct overspending than anything else. I believe it will be more difficult to decide what they do overseas. If they do decide to plough on and keep on operating in these regions, some of that may take longer to turn around.” With a plan in place and a new CEO at the helm, Asos’ success at turning the business around remains to be seen. Is it possible for Asos to reclaim its crown as the golden child of online retail? “I think it's difficult to see them going back to where they were and holding the court position they once had,” says Huggins. “The environment has changed, and competition is a lot more intense now. Online retail, especially since the pandemic, is a more mature market than it used to be. It’s no longer guaranteed very high growth every single year. We’ve also seen some moderation with people going back to stores since the pandemic. Ultimately, I’m not sure Asos can rely on the tailwinds from market forces it has enjoyed in the past.” According to Huggins, only time will tell how well Asos will fare. “Retail and fashion is a notoriously difficult industry,” he concludes. “This is why you need to execute well and be very disciplined in the way you spend money. You need to always send the right messages to customers, and you need to deliver very good customer service because otherwise customers will vote with their feet. With so many options for buying clothes, even giants like Asos cannot afford to take risks.”

After a tough golden quarter, can Asos reclaim its crown?

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