Asos profit falls by two-thirds as expansion costs push up debt
Profit at Asos fell by 68 per cent in the year to August as the UK fashion giant took a hit from a major overhaul of its business model and costly international expansion.
The online retailer blamed the drop on a costly operational expansion into Europe and the US which was fraught with problems including not being able to cope with demand.
However, Asos’ share price rose more than 16 per cent this morning, as investors backed management’s turnaround plan.
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The figures
Asos’s profit before tax fell to £33.1m in the 12 months to 31 August, down from £102m in the same period a year earlier.
The group’s revenue rose 13 per cent to £2.73bn from £2.42bn a year previously.
Feeding into this was a rise in UK retail sales of 15 per cent and an increase in international sales of 11 per cent.
Asos burned through cash in 2019 and swung into a net debt position of £90.5m, having finished the year to August 2018 with net cash of £42.7m.
The firm’s diluted earnings per share fell 70 per cent in the year to August to 29.4p, down from 98p a year earlier.
Why it’s interesting
Asos warned earlier this year that full-year profit would take a hit following major problems at the firm’s new warehouses in Berlin and Atlanta as the retailer targeted international expansion.
Today the group said its dramatic fall in pre-tax profit “reflected a number of transitional impacts from the logistics transformation programme and warehouse implementations undertaken in the year”.
However, Asos said it had identified the root causes of the issues and is making good progress fixing the problems.
The retailer also outlined plans to strengthen its senior management team next year, adding a chief growth officer, chief commercial officer, chief people officer and chief strategy officer to the company.
Tom Stevenson, investment director at Fidelity Personal Investing’s share dealing service, said the drop in profits was “inevitable” amid rising costs and competition’s price cuts.
“The halcyon days when Asos had the online fashion marketplace to itself are in the past. It will be a hard slog getting profits back to last year’s £100m,” he said.
Stevenson said the company had underestimated the costs of becoming an international firm, and that the retailer remains a volatile stock for shareholders.
“For investors it has been a roller-coaster ride. The shares have twice soared to £70 and returned to £20 or so. Bulls of the stock will hope it’s third time lucky but they have learned that this most volatile of AIM stocks has the potential to make and lose serious money for investors who time it wrong.”
Pointing to the lack of a dividend, Stevenson added that for investors, Asos is “an act of faith”.
Arlene Ewing, investment manager at Brewin Dolphin, added that the rise in debt could be worth it if Asos solves key issues such as stock availability.
“Revenues have increased more or less in line with expectations and the company remains profitable – albeit, profit before tax is significantly down on last year,” Ewing said.
“It will take some time to judge whether Asos’ investments have paid off – investors will have a close eye on the next few sets of results.”
What Asos said
Chief executive Nick Beighton said 2019 “was more disruptive than we originally anticipated. However, having identified the root causes of our operational issues, we have made substantial progress over the last few months in resolving them”.
“Whilst there remains lots of work to be done to get the business back on track, we are now in a more positive position to start the new financial year.”
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“With over 60 per cent of our revenue coming from international customers and a strong global logistics platform with capacity to grow, we are well positioned to take advantage of the global growth opportunity ahead of us.”
(Image credit: Getty)