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A red herring and a pig wearing lipstick meet in a bar. Both forget their wallets.

Over the last 2/3 years I actively tracked ASOS and its performance. They have been in trouble since late last year and their turnaround plan is in full swing and I have some questions still remaining over their viability. Last week, they released their financial statement on the state of this turnaround plan and It was interesting. Included here were some really useful pieces of information and a series of questions. We also got a view on the restructure of the debt instruments they claim will give them runway until 2026. More than ever, their position as an acquisition is in good shape. It also reinforced my belief that there is an urgent need for a Brand owner to create and build the vision to give direction on all fronts if ASOS, as we know it, is to survive.

Home markets are ok - but as demonstrated earlier this year, new acquisition rates are dropping and ASOS had a drop of 800k active users in 2023. Partially due to the lack of trade in Russia. The 9 month view includes peak and some less profitable trading activity. What happens over the next 6 months is key to understanding their turnaround initiative.

Headlines as presented:

  • EBIT up more than £20M YoY and guidance is strong for the second half.

  • This came as revenue dropped 14% and as a reflection of trading and marekting changes.

  • Profit per order up over 30% - removal of non performing brands and geographies.

  • Inventory held down 15% (was at a high of £1.1B in held inventory in 2022). And 86 % of stock sold within 12 months. (Let's come back to this).

  • Their new finance facility (funded fully through debt and a capital raise to pay interest) is "fully aligned" with the shift to reducing inventory, faster clearance of unsold stock and improving stock turn.

In reading through the statement I think there is much to learn about where things are so wrong for ASOS. This is very much a retail 101 strategy and going back to basics. But built on a a brand that is meandering, against the backdrop of a looming recession and a decrease in user base. Not to mention the impending impact of Chinese marketplaces entering the EU with better manufacturing, bigger budgets and a long term agressive strategy on real time manufacturing.

I have said a few times now that I think the brand is misguided, here's why. As part of this strategy there has been a change in sourcing and buying. This by itself is not a bad thing, actually it is pretty good:

It's now about completing the right-sizing of our stock, which will further restore our balance sheet; and continuing to improve profitability so we can grow again while generating cash. Or put another way:

1. We turn the stock we have into cash and buy less stock;

2. We improve profit per order by: i) improving our gross margin (our sourcing, buying, pricing); and ii) focusing on profitable orders (particularly internationally);

3. With a profitable base established, we grow again by investing into customer acquisition and lifetime value.

There is no instant fix and the necessary changes will take some time, but we are making great progress.

As I read this.

  1. Only happens through discounting - they have trained their customers (me) on this model. It is still happening. Or you bulk sell, like they have, to SecretSales and others.

  2. When we buy less stock and focus only on profitable orders it means we have a strong retention strategy. To deliver point 3, lifetime value.

  3. If you are doing this on an acquisition path, you have certainty on #CAC to inform your #LTV etc. Across all their key territories acquistion rates are dropping.

Buying better means reducing options. The volume intake has reduced by 36%. They obviously have a handle on their sizes and colours, so could this have been more. For H1 FY24, we will reduce intake by 33% and option count by 13% YoY.

It's not just me asking questions.

You might then question whether we can really sell this stock. Within the £1.1bn of stock we held at FY22, there was a proportion of old stock we felt could not be cleared efficiently through the ASOS platform.

£130M of stock was written off. This is probably included in the 86% of stock sold through in 12 months.

We believe the remaining stock can be cleared through our platform in the normal course of business.

This can only be done through discounting and enabling non profitable orders. The same but different? This is included in performance guidance. But is this a shift in brand? How does this do anything to change consumer attitudes - it doesn't. This is a reconigition that nothing changes only, we told you this would happen. The big bet then is on stock sell through being better.

We will clear high fashion product after one season, while continuity product (for example denim, where shapes can stay relevant for several seasons) will typically be cleared after two seasons (i.e. product bought for Spring/Summer 2023 cleared after Spring/Summer 2024). This ultimately leads to a better realised price as discounting closer to the season requires shallower markdown.

That is what eBay is for. This is where Boohoo and your competitors already are. This means you will discount deeper, quicker.

Learning from this experience, we have taken steps to improve the value for money of own-brand product. As a direct consequence of improvements to our sourcing and buying we can lower our prices or improve quality in own-brand, which should mean we can sell more while generating the same margin.

Buying less quality means you are competing in a different customer pool and this will bring down AOV but the hope I am guessing is that the basket size stays high. What will this do to a company with a huge challenge on returns.

3. We grow again by investing into customer acquisition and lifetime value
It is too early for us to outline the growth strategy for ASOS. We must first deliver on our target of turning our stock into cash and improving our profitability. However, the best way to create the conditions to grow is to offer again the best combination of fashion and excitement. This is precisely what we are doing. It is important to confirm our belief that as we restore ASOS to offering fashion-loving consumers the best product, with unique styling and an inspirational shopping experience, we can grow our customer base.

So buy cheaper clothes, compete for a higher CAC in a wider competitive pool. This to me, feels very risky.

There is no mention of customer, or demonstration of the knowledge of the customer. This is a model built around the hopes that the financial repositioning will be greeted well by the ever loyal customers who don's care. I remain skeptical. In their financial remodelling, they bought some time. Covenants in their refinancing are positive.

As is typical of financing from traditional lenders, our previous financing facility was subject to Net Debt/EBITDA and Interest Cover covenants. The new asset-based financing facility provides simplicity under a single lender and is subject only to a minimum liquidity covenant (i.e. there are no profit-based covenants).

Or in my lay persons view - keep money in the bank. This is a big ask. If this covenant is breached, so too has the wider dam.

  • Their turnaround strategy operationally.

  • Buy more best sellers

  • Reduce intake of long-tail

  • Manufacturing has gone from 20 week lead times to 2 weeks. Test and react is the new "path forward"

40% of their global revenues come from their own brand. Meaning 60% is not available to this test and react phase and margin control is not their own. Internal metrics on the growth of this would be interesting. This is what competitors are doing. With non performing brands being moved out and some admin processes being removed, there is a big bet here that their brand selection is going to be key. Also, a note on the removal of credit insurance. This equates to about 20% of trade payables. Depending on exposure and trade terms, the wrong requirement on cash will affect their liquidity. Which is their main covenant. If brands are moved out for non performance and their is a cash exposure, this is a real and significant risk. 20% of £1.1B is not a small number.

Brand, Brand and Customer

Did you know that ASOS means "As seen on Screen" - neither did I.

Who is the ASOS customer. Profit per order is kind of irrelevant to their strategy. This is a call out of overall cash and cost reduction. Profit per customers would be a better indicator at this moment in time. The brand has been around for a while and made poor acquistions. It bought itself - Topshop and Miss Selfridge as examples. Were afforable and high st, became expensive and lost their way. Acquistions need to offer something different to the core or at leastrr supplement a strong core. They are competing with Boohoo, PLT, NastyGal and plenty of others in this space. Their customers are not loyal and I think this is signalled by their point 3 in the statement - growth strategy is not yet defined,nor is LTV.

The external ASOS customer, is me. Or a version of me. I am lapsed. But, their proposition is built on free shipping, free returns. I remember buying my free premium shipping for all year round shipping. This is an example of a "prie challenge" gone lazy. I do not recall getting one mail after I bought the service. related to my delivery, everything was discount. Still is. 50% off 1000's of items was Monday's email.

Their returns stories are now stuff of folklore. I was in their fullfillment centre when they outsourced this to Clipper. December. 1M parcels were received in returns that first week. This proposition needs to be challenged, clarified and made profitable. This is not easy to wean people off.

Some info on their customers - but they know this, right?

ASOS dropped below 25 active users in H1. They are going on an acquisition strategy now but since 2019 they have grown from 20M users to a high of 26.4M users. 40% are UK based. How profitable is ROW and EU for them. Profitability per country is required. Outside of France and Germany, there is no country in the EU delivering more than 2% of revenue. There is no commitment to a customer group of country here.

Orders jumped from 72M to 99.7M in 2022. AOV for the period dropped from £71 to £38. And Profits went from £35M to a loss of £10m (highs of £190M in 2021). The number of brands they carried has fluctuated from 750 to 1000 over that period. At it's peak, it had approx 850. What does this ask? Is ASOS better doubling down on brand (where it is now) or should it be focused on marketplace. They could adopt a strategy to become a marektplace where selection is great, and selection per country is appropriate. That is a big piece of work and not as a attractive to acquire. And it would require alot more transactions with smaller revenue contribution per order. Also, I do not know the breakdown of how transaction fees are calculated across all the various sellers.

Info from:

Brand Building is not easy

To be a sustaining brand, ASOS will nbeed to become more than just a pureplayer. Their status as such remains a risk for me, particularly on new market entry strategies. To get into the test and react rhythm will require alot of investment in design cycles and you are competing against inditex and Shein at this point.

Brand building and selling requires ASOS to prioritise it's own brand over 3rd parties. They recently signed up with Criteo to deliver their retail media platform. This feels like it is a revenue grab as #RMN go. Unless they will build in a transparent way agains their competing brands and driving down the profitability of their own brand. This is a tough one to swallow.

ASOS, to me, is not a fashion brand and does not have stand alone authority to deliver against it's own strategy in this mode. ASOS is a platform, one for buying, one for discovery and inspiration. It feels very much like a tech platform first who sells their own products. The work being done right now and the message is putting lipstick on the pig. Dressing it up to get a better valuation.

The continuing lack of Brand/creative direction for me, signals that this is the true MO for the new board and SMT members. Until they make this appointment and declare to the market we are a brand or a marketplace, the writing remains on the wall.


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