ASOS Plc (OTCPK:ASOMF) Half Year 2022 Earnings Conference Call April 12, 2022 4:30 AM ET
Company Participants
Mat Dunn – Chief Operating Officer and Chief Financial Officer
Katy Mecklenburgh – Director, Group Finance.
Conference Call Participants
Charlie Muir-Sands – BNP Paribas Exane
Mike Benedict – Berenberg
Adam Cohrane – Deutsche Bank
Tony Shiret – Panmure Gordon
Operator
Mat Dunn
Good morning, everybody, and welcome to our first in-person results presentation over to users. Nice to see some familiar faces in the audience, and I know we’ve joined by a lot more people online. And today, I’m going to start by taking you through a high level overview and a view on our outlook before Katy takes you through the results in more detail. I’ll then come back and talk you through an update on the progress we’ve made in H1 against our strategic objectives, and then we’ll have some time for Q&A.
So let me start with the perspective on the results. So I think the first thing to say is that I’m really pleased with the fact that we’ve delivered revenue growth of 4%, in line with our guidance of mid single digits, and adjusted PBT of €15 million against what is the backdrop of probably the most challenging time I think our industry has ever faced.
We’ve delivered really strong operational progress despite the backdrop of those industry-wide supply chain constraints, and we’ve worked really hard to restore our stock profile to optimum levels as we head in H2 and look to accelerate our growth.
And despite this inevitable focus on the short-term challenges we faced in the first half, we’ve also made good progress against our medium-term strategy and we’ve accelerated change in several areas, which will set us up well for long-term growth.
As a result, we approached the second half well set up. And whilst we keep our guidance unchanged, safe the removal of Russia, there was undoubtedly incremental uncertainty for consumers worldwide.
I’m also really pleased today to announce that we have published our first annual Fashion with Integrity update, where we have reported on our results in full year ’21 [ph] as well as our continued progress in the first half of ’22.
This is in line with the commitment that we made at our sustainability CME in September last year, where we committed to publish our full year results annually each year at the half year.
Before I hand over hand over to Katy, I’d like to spend some time reflecting on our performance in the first half and, in particular, on the backdrop against which we delivered our first half results.
When we set our guidance last year, we could have never – we can never have foreseen the level of geopolitical and economic volatility that we would, in fact, experience. When we guided for the first half, we knew we were facing into a challenging six months as we cycled a period of tough comps, particularly in the UK, along with demand and supply pressures and significant cost headwinds. But of course, the rise of the Omicron variant in the run-up to Christmas generated incremental pressures, restricting consumer demand a key moment as well as exacerbating supply chain pressures as people isolated worldwide.
And then at the end of H1, we were confronted with the reality of war in Europe, which weighed on consumer sentiment and is fast creating incremental cost of living pressures as food and fuel prices escalate.
With this as the backdrop, I am really pleased with the revenue growth we’ve delivered and the adjusted PBT, and this is a testament to the resilience and sheer hard work of all of our ASOSers, but also a reflection on the [indiscernible] ASOS has been able to demonstrate a significantly improved capability to manage both short-term uncertainty while still working to deliver the long-term strategy.
As we look ahead, we’ve kept our guidance in place with the exception of the removal of Russia, which has a 2% [ph] impact on revenues and a £40 million on adjusted PBT. We are confident that the factors we outlined, which should support the acceleration of our growth, are largely playing out as we would have expected, but we are also facing into significant incremental uncertainty, especially as many of the cost of living pressures are still yet to be fully experienced by consumers.
What we do know is that we head into this key trading period well set up, having significantly improved our stock profile and availability, and this should support our ability to capitalize on the factors we expect to support consumer demand throughout the second half of the year.
Its absolutely clear that the consumer activity is picking up. The holidays are again a part of consumers’ lives and that the summer of 2022 will definitely be a summer of events parties and weddings. Whether the sun shines or not, it definitely feels like consumers are determined to enjoy themselves.
However, we’re mindful of increased uncertainty as the geopolitical risk weigh on sentiment, and rising energy prices and food inflation will weigh on discretionary spend. The next three months will be telling as we see how these factors play out on consumer discretionary income.
I’ll now hand over to Katy, who’ll take you through the key elements of our results.
Katy Mecklenburgh
Thanks Mat. And good morning, everyone. I’ll quickly cover our key financial results before taking you through the detail on the key drivers behind these numbers on the upcoming slides.
We delivered revenue of just £2 billion [ph] for first half, up 3% [ph] year-on-year in constant currency, which, as Mat said, is in line with the guidance we set out at the start of the year. Gross margin stepped back 100 bps [ph] versus last year, which I’ll cover later in the presentation.
Turning to overall profitability. While adjusted EBIT margin stepped back 400 bps [ph] we did record an adjusted profit before tax of £14.8 million [ph] This reflects the expected non-recurrence of the [Technical Difficulty] £86.5 million versus £20 million versus half year last year, and we remain on track to spend circa £210 million [ph] across the full financial year.
Finally, we ended the half with net debt of £62.6 million. To give further context to our half year numbers, over the next three slides, I will cover three of the key operational elements that have impacted performance, starting with stock availability before turning to the launch of Lichfield and changes in consumer demand patterns.
As we have mentioned, our stock availability was adversely impacted by the global supply chain constraints, impacting H1 sales growth. This is best demonstrated by our views availability metric over the period.
We define views availability as the percentage of stock available on the product pages viewed by customers. This is an important metric for us as it indicate how effectively we can service customer demand across all of our markets and categories. The graph on left of the slide shows how full price views availability has tracked total group level since the beginning of FY ’21 [ph]
As you can see, views availability has remained below our target level for the first half as supply chain disruption drove longer lead times for deliveries, which, in turn, led to backlogs developing at our fulfillment centers as stock arrived outside the planned schedule.
This has, in turn, weighed on growth as we have not been able to fully service the available demand during this time. Just to note, the drop over peak is the usual trend for that period, driven by the high sell-through rates during Black Friday and the Christmas period.
The same trends can be observed on the graph on the right, which focuses on full price views availability for dresses. This has been a particular challenge for sales in H1 [ph] as we’ve seen the relaxing of restrictions and the recovery of going-out mix across many of our key territories, which we not been able to fully service.
However, pleasingly, we have seen sustained improvement in views availability over the last few months, reflecting the improvement in our underlying stock profile, and we are in a substantially better position as we enter H2.
The expansion of our fourth fulfillment center in Lichfield has progressed really well, with the scale up progressing ahead of expectations. Lichfield contributed to peak ahead of plan, enabling us to increase our stock holding and optimize availability. It also performed ahead of the original capacity expectations, adding 1million [ph] units more capacity than we had originally planned, which also translates into higher throughput.
In the first half, we saw sales mix return to the more traditional balance of categories with going-out wear sales growing 15% year-on-year, as you can see on the graph on the left.
As a core category for us this is particularly pleasing. We expect demand for going-out wear to continue to increase in the second half, which we are well positioned for given our improved stock availability. The shift in sales mix into going-out wear comes with an associated increase in the returns rate.
As you can see on the right, returns rates are trending back towards pre-pandemic levels. We expect this to continue. However, the pace and extent of this normalization remains uncertain.
As an example, we have seen a higher step up in returns rate in February than anticipated, as we saw a similar dynamic in October where the returns peaked and then dropped off again.
Turning now to our results by region. Despite industry wide supply chain constraints impacting stock availability and newness across all markets, the UK and US return to growth of 8% and 11% respectively.
In the UK, this was driven by stock – by strong peak trading across November and December, as well as good performance across the Topshop brands, Face and Body and Sportswear, reflecting good customer engagement with a full ASOS offer.
Notably the half and particularly P2 saw the UK cycle a period of lockdown where customers were forced online by the closure of physical retail and hospitality venues. Against this comparative period where sales grew 39%, further growth in both sales and customer numbers was particularly pleasing. Whilst increases in frequency and our premier customer base in the UK are also strong indicators of a more engaged and loyal consumer. We also saw growth across visits, orders and conversion during the period, while ABV stepped back slightly due to increased markdown and a higher returns rate.
We are pleased with our US sales growth which was undoubtedly constrained by supply chain disruptions and port congestion, which in turn impacted our ability to fully service the available demand. Performance strengthened throughout the period as we saw strong promotion mechanisms drive sales over peak and specific events such as the Super Bowl.
Active customers were up 6% versus last year, while Premier customers were up 58% versus last year and 17% versus the start of the current year, reflecting the improvement of the Premier offer in the US.
Sales were also supported by the Topshop brands which grew triple digit versus last year, and ASOS’s wholesale business which was expanded in the period to include ASOS design, as well as Topshop and Topman product.
EU growth of 1% reflected both supply chain constraints, as well as the consumer uncertainty linked to the Delta and Omicron waves and the associated restrictions that arose during and persisted throughout much of the period.
Within the EU performance in Germany remains solid with growth in the mid single digits. While in France sales declined as we observed customers returning to the High Street, resulting in lower visits.
As we approach the end of the period, we saw demand in Germany increase in line with the government’s announcement that the easing of COVID restrictions will begin in March, with traffic basket metrics and customer numbers all benefiting as a result of this, as well as good performance over the sell days period in France, where our localized approach to discounting resonated well with customers.
Rest of World continued to decline year-on-year as delivery lead times constrained growth. For example, in Australia, the average time for express delivery was six days in H1 compared to our fastest delivery of two to three days.
As announced in the RNS published on the 2nd of March, sales have been suspended in Russia following the invasion of Ukraine, and is expected to have a circa full year 2% impact on sales and circa £14 million impacts on adjusted PBT for the year.
Taking a more detailed look at gross margin, which has declined 190 bps year-on-year. The main drivers of the decrease are consistent with P1, as increased markdown activity to clear spring summer ’21 stock and inflated freight and duty costs have continued throughout January and February.
P2 gross margin year-on-year improved in part due to softer comps and pricing benefits from the low to mid single digit increases communicated as part of our P1 trading statement, which began to take effect in P2. Improvements in buying margin throughout the half were driven by sourcing benefits, supplier negotiations in the Topshop acquisition.
From an outlook perspective, although we expect gross margin trends to improve in the second half of the year, we now expect gross margin to be between 100 to 150 bps down for the full year. This is primarily driven by two factors.
Firstly, while we have locked in sea freights contractually for the balance of the year, these are at a higher rate year-on-year. And secondly, given the potential impact in H2 on consumer sentiment and discretionary income, we do expect a sustained level of promotional activity in the market.
Now turning to remainder of the P&L. Excluding the impact of adjusting items we have seen increases across the majority of cost lines, but particularly in supply chain and marketing.
Taken together supply chain costs being distribution and warehousing have increased 190 bps year-on-year reflecting the expected non-recurrence of the COVID-19 tailwind, which drove a 49 benefit last year.
In addition, within warehouse costs, wage increases and the opening of Lichfield as a manual facility have driven further increases in costs. The increase in wages is expected to be permanent.
In contrast, work is currently underway to automate Lichfield, which means that the cost drag from manually processing orders at the site instead of Barnsley, which is highly automated, should drop away once automation is completed in late FY ’23.
As announced at the Capital Markets Day, a key part of ASOS’s strategy is to invest in marketing to drive brand awareness. This investment which is focused on broad reach marketing begun in H1 despite the cost pressures we have faced elsewhere in the P&L and drove a 50 bps increase in marketing costs.
Within other costs, we have continued to focus on removing costs from the business. Operational excellence initiatives during H1 have successfully targeted amongst others areas savings across procurement and technology spend.
Depreciation has increased versus last year due to truly global retail system going live in March last year and Lichfield being launched in August 2021. Finally, the 40 bps increase in interest costs has been driven by the interest expense on the convertible bond which was issued in April 2021 and will analyze during H2.
As mentioned in the results summary, adjusting items for the half totaled £30.6, £5.5 million of this was incurred as part of our transition to the main market of the London Stock Exchange, which was completed in February and £7.9 relates to our acceleration of ASOS Reimagined, which in H1 has focused on the reorganization of the commercial function, and an expansion of the executive leadership team. These were both guided in our P1 results announced in January.
Consistent with the prior year, we have continued to treat the amortization of intangible assets acquired as part of the Topshop acquisition as an adjusting item, consistent with market practice and to ensure comparability within the industry.
Furthermore, there was a release of the provision for employee and other costs that were made as part of the acquisition and totaled £6.4 million, which has been treated as adjusting consistent with the approach we took off to the one-off and acquisition and integration costs in FY ’21.
And lastly, the Leavesden impairment. For clarity this is one-off, non-cash impairment charge relating to part of ASOS’s office space at Leavesden, which has been vacated and sublet third parties.
In line with accounting standards despite the incremental cash flow from the lessee payments, the change in the use of the asset triggers an impairment review and the change in the value and use of the assets and has resulted in the right of use assets and associated fixtures and fittings relating to the sublet spaces being written down to their recoverable amount.
In terms of our full year expectations for adjusting items, we expect no further costs relating to the main market transaction, Leavesden impairment and Topshop one-off. However, we expect a further £10 million to £15 million of costs relating to ASOS’s Reimagined and our full year number of amortization of the acquired intangibles will be circa £11 million.
At the end of the half, we are in a net debt position of £62.6 million. As a reminder, due to our stock by profile, H1 is normally the lowest net cash position of the year. The decrease versus FY ’21 year end has mainly been driven by lower profitability in the first half of the year, which has been covered on the preceding slides, as well as the working capital outflow.
While working capital is always an outflow in H1. This year, it’s more exacerbated due to the accelerated intake of stock ahead of spring summer, and extended storage capacity due to the launch of Lichfield at the end of FY ’21, as well as the extended lead times affecting FOB and inter-warehouse transfers, impacting stock that’s not available for sale.
While we talk about cash flow, I’ll also touch on inventory levels. As you will have seen inventory levels are up circa 40% on the year with additional stock driven by the impact of the network of the supply chain constraints in particular lead times which requires higher stock holding and the cost of freight and stock.
We are also carrying additional stock associated with the ramp up of Lichfield combining these factors – combined these factors drive circa £150 million of the inventory balance at the half year.
Of the remaining amount a proportion is driven by an increase in value per unit due to the mix of product, as well as a deliberate effort to bring stock in early start of the season. If you take all of these factors into account, saleable stock cover is broadly similar to last year.
CapEx of £86.5 million also represents a step up from last year, mainly driven by spend on automation at our sites in Atlanta and Lichfield, as well as increased investments in technology, centered around data capability, payment platforms and commercial systems.
In terms of where we expect cash flow to land at year end, given the impact of Russia, we would expect a working capital outflow associated with a rebalancing of stock.
Mat Dunn
Thanks, Katy. Before I take you through an update on our progress in the half against our strategic objectives, I thought it worth us taking a moment to recap on why we believe we are well positioned to capture the long term opportunity ahead of us, despite short term volatility.
So hopefully you’ll all know by now, our vision is to be the go to destination for fashion-loving 20-somethings and no one else is actively and exclusively focused on this segment of the market. And that allows us to do 20-something fashion better than anyone else.
And given our strong heritage of catering to 20-somethings, we remain well positioned to capitalize on a huge opportunity ahead of us. We’ve built an extremely in-depth understanding of our customer, a customer, which spends 50% more of their disposable income on fashion than all the consumers. And our unique combination of own brand and partner brand offer is highly relevant and differentiated for those consumers, which means they shop more frequently with good basket sizes, and this in turn drives favorable economic for ASOS and its shareholders.
To support our unique offer, we’ve built a strong, scalable global platform and relevant infrastructure to leverage in our next phase of growth. And there remains a huge opportunity ahead of us with a tam of £430 billion in the markets in which we operate.
And as you will hopefully remember, we have multiple levers for future growth and margin improvement. We’ve already begun to execute this plan with a new level of discipline.
You recruit – you’ll recall from our Capital Markets Day in November, that our medium term commitment centered on leveraging our platform and capabilities, amplifying our winning offer and doubling the size of the US and Europe as we drive international expansion.
And whilst this plan was never intended to be delivered in just six months, I will talk you through the key progress we have made on unlocking our medium term potential today.
Firstly, as part of our work to leverage our platform and capabilities, our first focus was on expanding our platform through the rollout of flexible fulfillment. As discussed at our P1 trading update, we rolled out our Partner Fulfils program in the UK in partnership with Adidas and Reebok in early November. This pilot stage of the program supplements our existing stock profile by offering additional availability of our existing range where we have stopped out driving incrementality on sales. The first phase has proven successful and the customer experience is working well.
In parallel with this pilot, we have continued to make good progress in terms of the platform capability development, and specifically we’ve developed the capabilities to take on Adidas product early in the lifecycle even before we have received the stock in our warehouses. And we’ve been able to enable the first iteration of our range extension which we are piloting currently with up to 250 new styles that aren’t currently available on asos.com going live this month.
In the half, Partner Fulfils accounted for circa 8% of our Adidas and circa 7% of our Reebok gross sales in the UK, all of which we believe is incremental and we sold over 77,000 units through Partner Fulfils.
In the second half, we will expand our Partner Fulfils Adidas range in the UK and this will include the addition of more styles that are not currently stocked on asos.com, providing customers with even more choice. And we are also actively working on and remain on track to launch Partner Fulfils in select European countries by the end of FY ’22.
We also expect to onboard additional brands into the Partner Fulfils program by the end of the financial year, and working on new integration partners which will open up a larger number of brand opportunities for the next financial year.
Overall, I’m really pleased with the progress we’ve made. And everything we’ve seen so far suggests that the potential opportunity in this area is as significant as we initially thought.
We also continue to deploy other changes in our technology to enhance our customer offer and have made improvements specifically through personalization, experimentation and tailoring of category experiences. There’s a lot of detail on the slide. But overall what we are seeing is that our increased level of experimentation is driving an every improving experience for our customers, one that is becoming more personal, more relevant and more engaging. There is much for us still to do, and we continue to invest to build our capability. But I’m pleased by the progress we’ve made so far.
At the Capital Markets Day in November, we spoke to in detail about the importance of our Premier offer in driving increased customer loyalty and improve customer economics, with Premier customers in the UK shopping five times as frequently as non-Premiere customers.
The results of price optimisation and the launch of two Premiere parties has seen a step up of 24% in Premiere subscribers across the group on the year showing that customers are engaging with more parts of the ASOS offer, which we’re really pleased to see.
We saw the largest step up in the US followed by the rest of world which is supported by the resumption of the Premier offer in Australia. Growth in the UK was supported by the Global Premiere Party in October and the UK and Ireland premiere date in February.
Turning now briefly to our brands, the Topshop brands have continued to perform well on the ASOS platform, as we approached the anniversary of the launch on the 22nd of February. We’ve seen sustained tip triple digit growth of nearly 200% on these brands, comparing against sales pre-acquisition on the ASOS platform, and even more pleasing is that customers who shopped Topshop and Topman are highly valuable, with high frequency than our average ASOS customer and greater engagement with other aspects of our platform. And incredibly, but perhaps not surprisingly, given how popular we know they are Topshop jeans are also the number one jeans brand on the ASOS platform.
As we move into the second half of our year of owning these – the second year of owning these iconic brands, we will drop 400 new styles on site every week, continuing to maximize our speed to market and elevating and differentiating the product. It will be supported by our new brand led commercial structure, which I’ll talk about in a second, which will enable us to unlock further opportunity.
As we look towards the key categories we’re focusing on, I also wanted to spend a moment on sportswear, where despite tough comparables and supply chain constraints, sales stepped up 12% on the half. As sportswear sales have been supported by unique female first fashion ends approach to the category. And I’d like to share with you an example of this approach for our collaboration with the North Face.
We have worked closely with the team at the North Face over the past few years to co-create best-in-class product aimed at serving an untapped fashion loving 20-something female consumer with fashionable sportswear. And I think this is a great example of where we can bring our unique capabilities to bear to benefit our partners working in true collaboration to expand the range and fashionability of their products offer.
This has involved involvement from all other parts of our commercial team from design to the studio delivering a truly differentiated offer. And you can see on the chart the results of this, through our collaboration with the North Face sales have significantly grown in recent years. And while sales have stepped up overall what is particularly pleasing to see is that shifting gender mix of sales from 85% menswear in H1 ’29 to 5050 today, a unique achievement in a traditionally male dominated category. As we evolve our dedicated partner organization, we will be able to deliver this for more brands adding value to them to our consumer and to ASOS.
The build out of our local operations is also progressed well. In the first half we have appointed more senior trade heads for the US, France and Germany and southern Europe. And in the second half of the year, we will focus on localizing our assortment with a particular focus on the US where ASOS Edition, ASOS Luxe and plus size range resonate well and we will accelerate the rollout of more dedicated options.
At the Capital Markets Day, we presented on our objective to build our awareness and consideration among US and European consumers. And we embarked upon a broader reach of marketing activity in support of this in the first half.
As we talked about at the time, this first phase rolled out on a test and learn basis, targeting 18 to 34 year old females and this was rolled out across multiple platforms including TikTok, YouTube, Snapchat, Hulu and Roku across a number of core test areas within the UK, US and France.
The feedback we’ve had and the learnings we have received have been incorporated and iterated into the next round of testing which is rolling out already. We will continue to test and learn but we currently expect the scale up of our broad reach efforts to take place from the fourth quarter onwards.
However, we will need to do this in a deliberate manner continuing our test and learn approach and ensuring we balance this against the reality of the consumer environment as it evolves.
In November, we also successfully debuted our first drop in partnership with Nordstrom a physical product which featured an edit of ASPS Design, ASOS Edition and ASOS Luxe ranges in two physical stores. In February, we further extended this offer to two additional retail concepts providing customers with the opportunity to touch and feel everything at The Grove in Los Angeles with a Glass Box, a dedicated Glass Box and also a pop-up in store with 120 options available across both womenswear and menswear.
The ASOS Glass Box concept featured a carefully curated assortment of ASOS styles along with a wall to wall digital screen with featured content to inspire customers as they browse the selection of our product. A pop-up with the Grove featured a dedicated retail experience within the Topshop by Nordstrom store and this featured a broader range of styles, merchandise from a selection of other – merchandise with a selection of other popular brands from Nordstrom that customers know and love.
I’m pleased with our progress so far and its really great to be able to deliver an ASOS experience in a physical environment in store for the first time with Nordstrom and we look forward to continued progress in the second half where we will expand to a further drop and of ASOS brands in 10 stores and online.
As I mentioned earlier, today we also published our first annual update as part of our Fashion with Integrity 2030 program which reports on our progress for the full year ’21. We last updated you on March of our for year ’21 – full year ’21 progress in September at our Sustainability Capital Markets Event but we’ve continued to make headway across the goals underpinning the program since then, and some of the highlights include a reduction in Scope 1 and Scope 2 emissions per order of around 59%, a 42% reduction in transport emissions per pound of profit. We’ve also mapped 100% of all our Tier 1 to Tier 3 ASOS own-branded suppliers and we are currently focused on mapping our Tier 4 suppliers with 89% of them currently engaged in this process. And we also launched a new package of policies to provide crucial support to colleagues going through health related life events.
As well as making progress on a number of focus areas, we have begun to optimize the business around three areas. Delivering a seamless end to end product journey, having a fully optimized customer experience enabled by best in class data and digital product capabilities and delivering that experience in a tailored way globally. This will require fundamental changes to the way we work. The commercial changes I will talk you through shortly are the first step in creating a seamless end to end product journey. But we also working hard to improve our end to end supply chain visibility and capability. And there’s much more to come in this area.
Our product journey today is good, but we can evolve it improving our speed, agility and relevance. As we look to enhance our customer experience, we’ve recognized that our capabilities are not yet where we would like them to be. And so we’ve created two new roles on the executive to ensure we have the right level of focus and capability, a Chief Data Officer and a Chief Digital Product Officer in support of the elevated focus on these two areas.
We’ve also begun to increase the size and scope of our dedicated geographical teams, but the size and capability of these teams will only increase further as we continue to build our model out.
We are focusing on the US at the moment as you heard earlier, but we will apply what we learned to other geographies around the world. We are making good progress on these changes. But to be clear, this is a multi-year change across the organization. The last six months has seen a significant amount of change in this area all in support of our strategy, but we know there is much more for us to do.
In terms of moving our products off road, we’ve begun a fundamental overhaul of our commercial model in support of the objectives we laid out at the Capital Markets Day to unlock the growth of our own ASOS brands, partner brands and to support our international expansion. This change is centered around the creation of a product centric organization with dedicated teams focused on our own brands, partners, key categories and geographies.
Previously, commercial was organized into two key divisions, womenswear and menswear. And within each there were teams of buyers, designers, merchandise who worked across all of the brands and geographies. What we are creating now are separate teams who will work collaboratively across buying design and merchandising and sourcing in support of a particular brand.
We’ve also created a dedicated team focusing on our partner brands and clear geographical ownership. This means we are better prepared for future growth and have a natural way to add new brands, product options and channels or geographies.
In turn, this approach will create more dedicated autonomous teams that should enable faster time to market by removing hierarchies and simplifying decision making. It should also help us to provide a better more seamless service to our partner brands, as we pull them apart from our own brands, as well as allowing even more resources to be dedicated to tailoring our experience for each territory.
While this will take time to effect, we are extremely excited about what this can do for ASOS. It is the most fundamental overhaul of our commercial organization that we have ever implemented. And we have consulted widely, looked at best in class and are confident that this will set us up for the future.
We’ve also reassessed our data capabilities and data strategy and are looking to accelerate our efforts in this area to ensure data, data science and insights are pervasively woven into the fabric of ASOS to continue to enhance consumer value.
Through this, we have defined four key changes, which will accelerate our efforts in this area. And these are setting up a dedicated data organization led by a Chief Data Officer with embedded data product management capability, improving our data governance and focusing on quality and ownership to drive improved business operation, evolving our data architecture to – architecture to enable even greater agility and speed of development, and continuing to scale our investment in data engineering and use case. These changes may well seem obvious or even overdue, but they are necessary and we were proceeding with them at pace.
Let me now briefly summarize before we turn over to Q&A. We have delivered results in line with guidance despite a challenging environment, and we enter the second half in a materially better stock position, whilst looking forward to the return of many of the traditional drivers of demand in the second half.
We know there is heightened uncertainty in H2. But I’m still confident in our ability to deliver continued progress and accelerate our growth. Today I’ve also spoken to you about how we’ve delivered on our strategic commitments, e.g., with the launcher Partner Fulfils, but as well as these commitments, hopefully you’ve also got a sense of the extent of the change we are driving in the organization to set ourselves up for the long term, including how we are reorganizing our executive leadership and commercial teams and how we are implementing our data strategy.
These are essential changes in support the delivery of our strategy centered on changing how the company delivers its outcomes. And so whilst H1 has been a challenging six months, I’m pleased with our progress to date, both operationally and strategically.
I’d now like to open up the session to Q&A and we’re going to start with questions in the room. If you can raise your hand, someone to bring your mic and if you can say your name and institution that’d be helpful.
Question-and-Answer Session
Operator
Q – Charlie Muir-Sands
Yeah. Good morning.
Mat Dunn
Hi, Charles.
Charlie Muir-Sands
Morning, Mat. And thanks very much for taking my questions. So it’s Charlie Muir-Sands from BNP Paribas Exane. So the first one, I’m afraid comes in several parts, but it’s effectively what gives you confidence that you will see an acceleration in sales in the second half, aside from the fact that the comparative basis is not as tough.
I wonder whether you can sort of give us any kind of color on current trading, how much do you think that the availability problem was actually held back? Your ability to drive demand in the first half given that traffic wasn’t exactly strong?
And also, I suppose, all wrapped in that, can you give us any more color on the marketing effectiveness that you’ve seen through the broad reach campaign? That’s question one, all related to confidence in the first half…
Mat Dunn
So I answer that before, otherwise, I’ll forget it, and I won’t be able to remember what question one is. So I mean, I think what – the things that always gave us confidence, were around the expected uptick, that we – in consumer activity, in consumer activity associated with our product.
And everything we’re seeing, when you – when you I mean, when you walk around London through to what we’re seeing in terms of, of what we’re seeing on our site right now, is that people are absolutely 100% [ph] buying into the going-out categories, which have traditionally been a core strength of ours. And even though it was constrained by availability, we’ve just done our biggest ever season on dresses ever.
So I think we are confident of the demand drivers. And we’re also confident that we have got an appropriate stock profile to meet that demand. And it’s definitely true to say that we lost, you know, we lost sales in the first half because we didn’t have an availability of the optimal product that we would have liked.
So I think if you kind of look half on half, my expectation was you should see a demand pick up, the world is a very different place in April 2022, to where it was in September 2021. But also, we’re much better able to service that demand. I think the notes of caution that we’re applying to that is clearly around the effect of cost of living pressures on disposable income.
And I think the challenge there for all companies, but definitely for us given we’re announcing today is that many of those are only really starting to impact consumers now. And therefore it’s very hard to read what the impact of those is going to be because they’re – you know, they haven’t been fully felt by consumers yet.
Charlie Muir-Sands
Thanks very much. And the second question is related to the full year guidance, obviously implicitly, the second half guidance. So you’re now flagging that gross margins are going to be a bit softer than you previously anticipated. And I guess that means you haven’t to offset that more with greater cost savings than you previously anticipated. Where do those incremental savings come through from?
And with respect to this of the reversal of COVID tailwind benefits, you mentioned the £49 million didn’t look like return returns rates have fully recovered through the first half versus pre-pandemic levels? So does that £49 million have gone to zero and then comes in a headwind ahead? Because you get the returns rates fully normalizing, plus incremental costs that you know, you didn’t have before? How should we think about in terms of to bridge on that?
Mat Dunn
I might ask Katy to comment on returns. But let me just turn on the overall COVID benefit. I guess we’ve seen most of the COVID benefit we always attributed to returns rates that weren’t associated with product mix, i.e., consumer behavior. And that is in effect almost completely unwound now.
So I guess what we’re seeing is in neutrality on returns rates, I guess what we are seeing is elevated freight rate, freight rates, I guess you could consider that to be a COVID dis-benefit, because it is actually a function of COVID. But we don’t – I guess we’re – we’re putting that in a different bucket in the way that we describe it. And obviously, you know, our guidance encompasses the freight rates.
I mean, in terms of the – your comments around gross margin. The – you know, clearly, as you’ve seen in the results that we’ve outlined, we’ve worked really hard on cost mitigation, and there’s you know, to the tune of £50 million worth of cost mitigation in the first half, a number of those activities will deliver benefit in the second half as well. And obviously, we will keep looking to mitigate the cost that we see. So, we will continue to manage our cost base in a deliberate and agile manner, I guess in dynamic manage manner to manage those pressures.
Probably the only other point I’d make from a gross margin perspective is some of that gross margin impact is taking Russia out. So it’s in part encompassed in the removal of Russia, which you mentioned at the start. Katy, is there anything you want to add on any of that or on returns rates?
Katy Mecklenburgh
I guess just on returns rates. We don’t – what you saw on the chart that we showed that the rate difference has to do with the category mix. And while we will expect returns rate to go up, as we mix back into the dresses and going out in H2, we wouldn’t expect to go back to pre-pandemic levels just because we – we’ve grown the other areas of the business that the mix will never revert back.
Mike Benedict
Morning. Mike Benedict here from Berenberg. Thanks a lot for taking my questions. I have a couple. Firstly, on the views availability chart that you displayed, do you have a number for the average reduction over the half? And then is the rule of thumb we can think about how that translates into revenue performance typically?
Mat Dunn
So I think I’ve previously said, we would target views availability to be between 75% and 80%. That’s the balance between stock levels and servicing demand. And we’ve through the balance of the first half, and if you actually looked at the annualization of peak, as Katy said, you’ll always see a spike around – down around peak because you build for peak and then you deplete your stock and then you rebuild it.
On average, we’re probably two to four points below that, depending on exactly where you strike it. So it’s quite a significant degradation. The correlation between views availability and sales is not absolute. So it’d be slightly misleading to give you an absolute number. But historically, we’ve seen a better than one to one return on every percent of views availability and what it does to sales growth. But it’s not a robust number, because they don’t correlate perfectly. And it very varies very much by geography. But what we know is as soon as we fall below the sweet spot, we feel it in the sales. And as soon as we go above it, we tend to be at an efficient level of stock, which will probably result in marked down, hence why we try and kind of keep it within that – those trend lines as much as possible.
Mike Benedict
Great, thank you. And second one is on marketing. So in H1 it was up year-on-year. And I think in the statement, you said you had both positive feedback and constructive criticism. And I wondered what the key learnings have been in terms of some of the early tests?
Mat Dunn
So I think I mean, there are a number of learnings. Some of them, I’m going to struggle to do justice to in terms of the – but I think I think – let me let me try and articulate it from my point of view. So I think we’ve – the critical learnings were about how we activate the creative. And what’s interesting is we saw a much better pickup in customers who were already aware of ASOS than we did in customers who weren’t aware of ASOS, which suggests that we need to be I guess more direct probably in how we get that creative cut through.
So a lot of the work on the plans for Q4 is focused on how to get more action ability of the creative itself and getting them kind of quicker to what does ASOS stand for. And that is a very non-marketing way to try and explain marketing. But I’ve done my best.
And I think the other thing we’ve learned is all around the kind of media mix and how we optimize the media mix. And therefore, we will go for kind of always on approach. Once we start we will continue that. We’ve seen that that consistent activation is better than short, which we’ve trolled consistent activation versus kind of bursts. And it can depend on what you’re trying to activate as to which one works best. But we’ve definitively learned – which is what we would have anticipated to be honest is that, that always on approach works better. And therefore we will take a geographical approach to that in the US as we look to roll it out in Q4.
Unidentified Analyst
Thanks. Andrew Wade [ph] from Jefferies. A couple for me. First one just in terms of the reorganization on the – sort of on the buying side of thing…
Mat Dunn
Yeah…
Unidentified Analyst
You’re talking about. Quite a big change there, obviously what you’re going to be getting through there and I can see the logic for what – why you’re talking about doing that in terms of giving power to the various teams. Just interested in sort of the trade off of presumably you lose something from doing that, as in – as a holistic view of doing womenwear altogether. That’s why it’s been done like that for years here for example. Do you lose sort of ability to have an overall view of womenswear or an overall view of menswear. So what’s the trade off there you’re interested in?
Mat Dunn
Yeah. I guess, at the highest level, the trade offs control. So, you know, by the nature of being more agile and decentralizing decision making you lose control. And I think the way we’re looking to kind of protect ourselves against that is that you know, we will – there is a matrix hierarchy that sits over the top. And we’ll look at both categories, i.e., dresses across the picture, denim across the picture, but also womenswear and menswear.
So we won’t lose that focus. But inevitably, I think it will shift. But, you know, José has been really passionate about. You know, ultimately, fashions as a speed to market, he often refer to going to use one of his favorite clichés, he often speaks about fashion being like fresh fish, speed and agility matters much more than control. And therefore we genuinely believe that the benefits significantly outweigh the risk of it.
And I think, if we’re honest with ourselves, yes, we’ve had the same structure for a long time. But potentially, we could have looked at doing it earlier. Again, we’ve looked at best in class companies, both within our category and in other categories. And they’ve had some success with these kinds of models. So it’s not like we’re doing something that’s never been done before. So I’m kind of confident that we can learn, we can learn from what we’ve seen work in other places as well.
Unidentified Analyst
Second, one, following on from Charlie’s question on gross margin costs, it sounds like there’s going to be some additional OpEx [ph] saving to offset some of the lower gross margin guidance, even if some of it is Russia.
Just in terms of those cost savings, are they structural cost savings that are going to be there for the long term? Will they come back when the gross margin recovers? Because obviously, some of the stuff you’re talking about in terms of the gross margin, the additional clearance and promo is temporary, temporary yet? Will the cost savings come back? Or is that a sort of structural change?
Mat Dunn
I think, Katy your perspective would be, I think my simple answer would be some and some. There’ll be some mitigation that, you know, where, for example, some of the stuff we’re doing with suppliers, where we’re sharing the pain of some of the freight, where we do FOB. I would expect some of that we will then you know, potentially, you know, we’ll work with suppliers. And we won’t necessarily retain all of those benefits in order we want to. But there’ll be others where we found the structural efficiency in terms of how we did the supply chain that should be structural. So I guess overall, some – Katy, if there’s any you want to build on that.
Katy Mecklenburgh
Yeah, no, I agree. I think that’s fair.
Unidentified Analyst
How should we be thinking about Russia in out years? Obviously, a very difficult one to answer, but…
Mat Dunn
Yeah, I think almost an impossible one to answer. I think – I don’t mean more general, I just mean, a vis-à-vis, you. But I mean, the reality is, the two things are related. So look, I think we – I guess what we have the benefit of is our supply chain into Russia was relatively simple.
And therefore, we’ve not had to turn anything structural off, that will be very difficult to turn back on. Again, we haven’t got loads of physical infrastructure in the market or any of those things. So in that sense, I guess we can and we’ll keep an open mind with respect to Russia. And hence what we just talked about kind of suspending rather than stopping.
So in that sense, I guess, you know, and we continue to engage with a very many of the partners, we use the partners we use in other places. So in that sense, I guess we keeping a watching brief is probably the best way to say it. At the moment, given what’s happening, it feels to me that it’s a relatively remote prospect, that is going to happen anytime soon. But, you know, I think we’ve all learned over the last few months that things can change much more quickly than you expected. So I guess a watching brief is the right approach.
Unidentified Analyst
Okay, thanks.
Adam Cohrane
Its Adam Cohrane from Deutsche Bank. And a couple of questions. In terms of the management board and things, can you…
Mat Dunn
Yeah…
Adam Cohrane
We waited about three years to get a full house at the top of the company. And some of them seem to have now departed and changed. What – we used to have this sort of structure with the five boxes at the bottom, what does that look like now? And how many spots are you looking to fill within that at the moment.
Mat Dunn
So in terms of the structure, rather than you try and talk it through, I’m happy to maybe we’ll add it as an appendix to the presentation that goes up in line because it’s much easier for everybody to see it. But in essence, we’ve added two new positions to the executive with the Chief Data Officer and the effective Digital Product Director.
So they are new roles. We’re actively recruiting for both of those and one, I’m quite hopeful we’ll have an appointee in very, very near term, but we’re not done yet. The other one we’re still working through.
We’ve also taken the opportunity to add some of our other leadership roles to the executive. So the GC and Company Secretary which is one role, but two jobs, has joined, the group supply chain director has joined the executive and we’ve also added corporate affairs stroke comes to our executives, so that’s why we’ll put it out for you. But – so it’s a more diverse group in terms of capability than it was before. And I think the reason that we’ve chosen to do that is to make sure that as we drive things strategically, we’re getting consistent alignment across the whole organization.
In terms of the kind of where we are in the changes, I think, you know, with the departure of a CEO and the level of change, we’re looking to drive that you’ve kind of hopefully got a bit of a sense of today, I think it’s almost inevitable that there would have been some changes. And we are – we have interim arrangements in place for those roles. And we’re actually not replacing the strategy roles, because it feels like we’ve moved kind of from strategy into execution. So that’s the kind of permanent change.
But we’re actively engaging with permanent replacements. Clearly, there’s some contingency on that and CEO, so there is a degree of uncertainty there. So I’m not uncomfortable with where we are. And it’s certainly as we engaged on this journey. It’s something that was anticipated by the board and me working closely with the board.
I’m also – and it’s much harder for you guys to touch and feel. But the depth of our leadership beyond the executive, actually, particularly in our customer facing organization is substantially different from where it was certainly two years ago, but even one year ago, so there’s a lot of depth of capability and hard for us to expose you all to that. But I’m also really confident in that.
So I feel actually, we’re in a position to go as quickly as we’ve ever been able to go, but doesn’t mean we’ve not like to be able to do more. And that will bring new people in, of course, we will. But I think we’re comfortable with where we are.
Secondly, the profitability of Russia was maybe higher than I anticipate…
Mat Dunn
Yeah…
Adam Cohrane
If you looked at the rest of the world now, does it have the same levels of profitability as Russia did or is that just because it’s – that Russian number is based on a marginal basis, it’s because not that many of your costs are allocated to it. And it’s just incremental revenues.
So if you were to do the same thing, say, for example, Australia is not making any money, it doesn’t work, cost of closing, it would have the same impact on group profit.
Mat Dunn
I think there’s probably two different ways to unpack that question, Adam. So Russia was not disproportionately profitable. On a short run basis, our ability to kind of absorb the fix, or what I mean, probably better to describe the semi variable cost is quite difficult. So I think I’ve talked about it before, but still, on average, on a 12 to 16 week basis, probably over 75% of our costs are variable, but on a zero, you know, on a zero to 12 week basis, they’re not variable.
So things like warehousing in the – warehousing in the – sorry, people in the warehouses, again, we could deliberately construct a base and then we’ve got a variable element, but you commit resource plans for six to 12 weeks similarly in the call center.
So I think I would caution against reading more into Russia’s profitability than we had to do it in a completely unplanned manner. We’d also bought stopped freight, which we’ll need to clear. There’s a number of elements, which means you can’t instantly recover the profitability in general, because of that variable cost base over the medium term. If we took a decision to exit a territory in it, it wouldn’t necessarily have the same level of impact, because you’ve managed it, you know, it was an instant turnoff over a very short period of time, which is driven that impact.
Adam Cohrane
If you look at Australia’s example now with the freight costs and all of the other challenges, if those freight costs don’t normalize, is Australia a viable proposition?
Mat Dunn
Yeah, because we price for them. And therefore, you know, your offer – it may settle at a level of sales, which would be lower than you would have if, but ultimately, you know, we trade rest of world profitably. And therefore, we’re always looking to make a profit by territory. And we price our – typically not necessarily a product, we price, our delivery offerings consistent with the costs of delivery. So the cost of delivery in Australia that we charge today are higher than they were pre-pandemic.
Adam Cohrane
Last one should be quite easy. In terms of income demographics of your customers, do you have a split of – I don’t know how you define it, but ABC, et cetera of your customer base, just thinking in terms of all of the household bills, if you’ve got a whole load of your customers who are in their 20s living at home, they may not have the same gas bill that we probably have to – have to put through and their disposable income may not be as squeezed as, as homeowners or something else. Is it something you’ve thought about?
Mat Dunn
It’s something we’ve thought about. I’m not saying – I’m not – I’m not sure we’ve gotten really reliable data to be able to kind of income bracket everybody. I think, as I think about it, I think, I guess the way I think about it is as follows.
I think in terms of where our consumer prioritizes this spend, it feels like they disproportionately prioritize going out and fashion relative to other consumers. And that has meant that fashion spenders traditionally been quite resilient, albeit, the precedents are relatively limited.
I think in terms of – as you say, and some of the factors you’ve outlined, or some of the reasons for that, they’re probably less exposed to long term commitments like mortgages, et cetera, which means they’ve got more ability to flex their spend, but also probably energy bills aren’t such a big consideration relatively even if they might form a, you know, but obviously, their average incomes are lower. So you’ve got to kind of balance it all off.
I think the other thing that I think from an ASOS specific perspective, I think, if we look at where our products offer spans and the range of price points that we are, I feel like in terms of the value we offer relative to the category, I feel that we’re in a really quite good place. I feel we’re probably as competitive as we’ve ever been in the UK, for example, from a price point perspective, and I think that will suit us well in this type of environment.
So it’s hard. I wish I could give you a more definitive answer. But you know, that’s the way we’re trying to think about it and all the time looking at data to try and enhance our understanding of it.
Adam Cohrane
Great. Thank you.
Tony Shiret
Hi. It’s Tony Shiret from Panmure Gordon, and I’ve got a few questions. Firstly, on the UK sales performance at the end of the year. Am I correct, I mean, it looks like it was negative for the last two periods. So first of all, is that correct calculation?
And alongside that, and bearing in mind, you put prices up, the gross margin has gone up over the tail end of the half. Just wondered if you were seeing any sort of price elasticity of demand, you know, any resistance your price increases in the UK? So that’s the first question, you can answer them individually, I’ll give you three more after you…
Mat Dunn
In my memory is not brilliant. Let me answer it, and then you can give the next one. So – I might let Katy comment on gross margin, but let me do. Some importantly, your calculation is correct, give or take. I think the – I think it’s a function of a couple of things. I think it’s a function definitely of the comparable and specifically the strength of the lockdown in the UK in January, February last year versus where we are this year. And I think that’s a big and expected driver, we always expected P2 to be softer than P1 in the UK based on that.
The other phenomenon that we’ve seen in the UK, specifically, which related very much to that end of Christmas, early January period was we saw weaker performance in our big events in January than we would have anticipated. And it feels like kind of looking back on it now that that was a function largely of Omicron creating uncertainty in consumers. And so a lot of the move period on period was actually isolated to the early part of January.
So I think there was an effect of Omicron there, which is probably more pronounced in the UK because it kind of came and went more quickly than perhaps it did in Europe where it felt like it kind of eased in and ease out again. So I think that’s a feature of us, second period performance.
I’m always cautious of reading too much into P2 because it’s only eight weeks versus four months. So you can end up with something like a three weeks spike in Omicron driving quite an impact on a eight week period. Plus it’s the sell period, which is not necessarily the most traditionally reliable. But those I guess are some of the reasons that we saw what we saw.
Tony Shiret
What was the average price increase in the UK…
Mat Dunn
Sorry. And on the pricing we saw an average price increase of low to mid single digit, but over the whole of our portfolio not just in the UK. I don’t believe and any elasticity is you’re responding as we would have anticipated, so I don’t think that price elasticity is a big driver of UK P2 performance would be my personal judgement.
And so – don’t know if you want to add anything from a gross margin perspective generally?
Katy Mecklenburgh
Just I guess the P1 to P2 gross margin year-on-year movement was mostly due to the base period. So yeah, there was an impact because pricing came in P1, but the biggest impact was actually to come.
Tony Shiret
In terms of marketing, the overall increase of 50 bps. I mean, the assumption, I guess from everyone here is probably that’s all focused outside the UK. I just wondered if you could or the increase, I wondered if you could confirm that the UK marketing spend was either the same as a percent or lower?
Mat Dunn
Without going into detail, that’s broadly correct.
Tony Shiret
Okay, fine. And looking forward, you know, bearing in mind the high rates of sales growth you’ve had in the UK. Do you feel that you’re going to need to market more proactively in the UK as a percentage?
Mat Dunn
Not necessarily, No, I think that the secular factors in P2 were not associated, I don’t think with consumer awareness and propensity to purchase. I think we’re cycling through a period of time, where last year, the only channel available was online, a lot of people hadn’t spent a lot of money over Christmas, and therefore they had more disposable income in January in February than perhaps it did this year.
So at the moment, and I guess, time will tell, you know, my expectation is it’s driven by a number of secular factors. We have always said that, clearly, for long term growth, we need to accelerate our growth outside the UK. We’re 50% up on a two year comp in the UK. You know, there was always an element of the fact that it probably was going to normalize to some extent. So I think we’ll get a better read of it in the second half of the year, to be honest.
Tony Shiret
Okay. And one last question. Following up from Adam’s question, you’re not quite sure how many people there are on the executive board at the moment and prospectively, looks like sort of 10-ish?
Mat Dunn
It’s not – I’m not sure. I just didn’t want to try and draw you a diagram in the middle of a meeting…
Tony Shiret
Yeah. The question simple how many women are there on the executive board?
Mat Dunn
There are three currently.
Tony Shiret
Out of roughly 10?
Mat Dunn
Correct.
Tony Shiret
Okay.
Mat Dunn
And that compared to one year ago.
Tony Shiret
Good.
Mat Dunn
Very good. We’re still working on it. But we’re pleased with the progress we’ve made. All right. I think we’re out of time. And obviously, if you’ve got any additional questions, and I apologize to people online, that we haven’t had a chance, although they’re actually fairly limited questions online, just looking at the screen.
The ones that we have had, we’ll try and follow up with directly and if anyone’s got any further questions, please do pick up with the IR team or with Katy or I, and we’ll endeavor to answer them across the courses today. Thank you, everyone, for coming. It’s been nice to see everyone in person. And hopefully we’ll see you all again and we’ll all be able to go back to normal lives. So thanks very much, everybody.
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