ASOS shareholders should unmute now
Asos has been in turnaround mode for an extended period, struggling to return to profitability since late 2021. Excess inventories, a time-consuming and outdated supply chain, and an inefficient operating model have left this former pioneer of European online fashion retail trailing its younger industry rivals in a challenging post-pandemic consumer environment. The emergence of Chinese fashion e-exporters, SHEIN and Temu, has further disrupted the entire fashion retail ecosystem.
The new CEO and management team, on board since summer 2022, have sacrificed top-line growth and relied on intensive promotions and discounts to clear excess and outdated inventory. Despite these efforts, the progress on inventory reduction and increased supply chain flexibility has yet to be reflected in profit margins. Investors have continued to walk away.
Ouch!
A weight loss exercise
Excessive purchasing and rapidly-changing consumer trends led Asos to end FY22 with £1.1bn in inventory, double its level of FY20. This has been a significant drag on the group's operating flexibility and profitability. Asos has lost weight. As illustrated in the chart below, the inventory level decreased to £593m at the beginning of March (H1 24), ahead of the target of approximately £600m by the end of August (FY24). About half of this reduction came from clearing old stock (over 12 months old).
Unsurprisingly, these markdowns have caused a 310bp yoy reduction in the adjusted gross margin and cannibalized the sales of other products, weighing on the top-line growth. Asos still needs to clear spring and summer stocks in the second half of the year. With this behind us, the group should present a more agile and flexible operating base from FY25 onwards.
To further improve efficiency and flexibility, beyond inventory clearance, the group announced in November last year the planned closure of its second UK fulfilment centre in Lichfield. Under Asos's new business model, operations will no longer require large inventories. This closure, which is expected to be completed by the end of May this year, is anticipated to result in annual cost savings of around £20m from FY25 onwards.
Lighter and faster
To stick to an "inventory light" model, Asos has implemented more efficient stock purchasing planning powered by data analytics. The group has significantly reduced the time from initial design to availability on-site (within two weeks), leveraging on closer suppliers in Turkey, Morocco and the UK. This shorter lead time has enabled the launch of the "Test & React" model (similar to SHEIN’s business model) last November, to test demand before production in size. This model covered approximately 5% of the own-brand business at the end of H1 24 (13 fashion-led own-brand labels, including ASOS Design, Collusion, Topshop and Topman, which constitute 40% of retail sales). The group is on track to achieve its "Test & React" target of about 10% of the own-brand portfolio and approximately 30% in the mid-term. The "Test & React" model is highly profitable (gross margin of 58%) with higher price points and shorter sell-through (3 weeks cover).
Brighter outlook in the UK
As illustrated in the chart below, the GfK Consumer Confidence index in the UK rose to -13 in July, improving for the fourth consecutive month to the highest level since September 2021. Falling inflation (2% in June) and the prospect of interest rate cuts have supported consumer confidence despite ongoing uncertainty regarding the impacts of the UK’s new government on the macroeconomic and personal financial fronts.
The UK remains Asos’s largest market, accounting for 44% of total sales in FY23. The British economy grew by 0.7% in the Q1 24, its fastest pace since 2021. Although this improving confidence has yet to translate into a notable increase in discretionary spending, the brighter economic outlook offers better visibility for the year ahead.
The faster-than-expected inventory clearance and better consumer environment in the UK have enhanced the group’s confidence in delivering on the FY25 guidance (with an expected return of the EBITDA margin to the pre-pandemic level of c. 6%).
Stiffer competition
The rapid global expansion of Chinese fashion e-exporters SHEIN and Temu has significantly reshaped the global fashion industry. SHEIN’s "Ultra-fast fashion" model has captured the attention of young Western consumers with rapid product launches (over 7,000 new pieces/day), a diverse range of collections and competitive pricing. North America and Europe are SHEIN’s main markets, contributing over 80% of the company's revenue.
Temu, the overseas branch developed by the third-largest Chinese e-commerce retailer Pinduoduo, was downloaded more than 120 million times (70 million times in the US) in the 12 months after its launch. Unlike SHEIN, Temu specializes in the diverse lifestyle and gadget categories rather than fashion items.
SHEIN's primary consumer base consists of 20-35 year olds seeking ‘affordable, distinctive fashion items for self-expression on social media’, aligning closely with Asos’s "fashion-loving 20-somethings." Asos had 21.4 million active customers as of March, in over 200 markets worldwide, whereas SHEIN claimed approximately 108 million monthly active users in Europe as of April. According to SimilarWeb (chart below), SHEIN and Temu continued to lead in terms of monthly global web visits from April to July this year, with SHEIN having three to four times the monthly web visits of Asos. Furthermore, Asos's monthly global web visits have been declining each month.
From design to shelf, SHEIN's unrivalled lead time has revolutionized the fashion industry, making production and collections dependent on real-time consumer demand data. SHEIN is the granddaddy of the "Test & React" model that Asos is still developing. Clearly, SHEIN’s efficient business model with competitive pricing poses a significant threat to the global fashion industry, particularly against Asos's own-brand labels, which target young consumers.
The own-brand labels business accounts for 40% of Asos’ overall revenues, and we believe that the growth of this segment will be challenged by fierce competition, particularly in the US market (14% of Asos’ total sales), where young consumers are less brand loyal and more price-sensitive, and where SHEIN's market share is much higher than in Europe.
