Fast-fashion giant ASOS grapples with high inventory and plunging sales amid weak consumer sentiment and high inflation

ASOS’s Inventory and Sales Woes

ASOS has been grappling with an extremely challenging year, characterised by excessive stock and dwindling sales. The company entered the fiscal year with heavy inventory, worth £1.1bn, a result of questionable inventory management over the past four years. This surge in stock levels led to increased discounting, which in turn squeezed margins.

Attempts to reduce the excessive inventory clashed with weak consumer sentiment and high inflation, leading to disappointing results. The company reported a 10% drop in sales, a free cash outflow of £213mn, and an adjusted operating loss of £29mn, a stark contrast to the £44mn profit in the previous year. The statutory loss, a whopping £249mn, included stock write-offs amounting to £133mn and additional restructuring and property costs.

What Comes Next?

Despite the dismal performance, there are glimmers of hope. The company has reported a 33% increase in profit per order and a 5% rise in average basket value, largely due to the company’s strategy to shed “lower quality” customers acquired during the pandemic. The new CEO, José Antonio Ramos Calamonte, is pushing for cost savings and a cultural overhaul.

However, Calamonte predicts further sales decline in the range of 5-15% in the coming year, a more pessimistic outlook than anticipated by market analysts. While the company expects growth to resume in Q4 FY2024, the uncertainty around consumer demand and ongoing inventory clearance affecting profits paints a murky picture.

ASOS’s Debt Position: A Cause for Concern

Adding to the woes is ASOS’s escalating debt situation. The management has refinanced the balance sheet, providing some stability by removing profit-based covenants. The company now adheres to a minimum liquidity covenant of £90mn.

But the interest rate on the new debt facilities is higher than the sterling overnight index average (Sonia), which stood at 5.2% at the period end. ASOS’s borrowing levels have skyrocketed, with net debt more than doubling YoY to £320mn.

Rising finance costs, which doubled to £46mn last year, coupled with a significant free cash outflow of £213mn, ring alarm bells for the company’s financial health. The company’s current situation calls for a sell recommendation.

Expert Analysis

ASOS’s predicament is a potent example of the challenges faced by fast-fashion companies in the current market scenario. High inventory levels, coupled with weak consumer sentiment and inflation, have put the company in a tight spot.

The company’s strategy to improve profit per order and average basket value by shedding lower-quality customers seems promising. However, this will need to be complimented with a robust strategy to reduce inventory levels, control costs, and boost demand.

ASOS’s debt situation is concerning, with high interest rates and soaring finance costs putting additional pressure on the company’s financial health. The removal of profit-based covenants does provide some stability, but the high borrowing levels and free cash outflow indicate potential liquidity risks.

The company’s expectation of returning to growth in Q4 FY2024 showcases a potential future upside, but this depends heavily on a recovery in consumer demand and successful inventory management.

The current scenario necessitates caution when considering ASOS as a potential investment opportunity. The company needs to address its inventory, sales, and debt challenges effectively to pave the way for sustainable growth. Until then, a ‘sell’ position seems to be the most prudent approach.