Trading Update

Jul 15, 2021

Earnings release

Good morning, all, and welcome to our P3 results announcement today, which, of course, covers the last 4 months to the 3rd June 2019. I'll start by taking you through a high level overview of the results and a little bit more color on Topshop integration progress and also our new partnership that we announced earlier this week with the launch of it. I'll then hand over to Matt who will take you through a bit more detail and and have some of the moving parts. And then of course, we'll hand over to questions at the end. So let me start with a quick overview of PGRE. P3 was another strong performance ASOS against a volatile backdrop. The very restrictions have an effect on changed demand patterns and bonus client churn pressures have impacted our flexibility to the end. Our reported growth was 31% year on year for the group on a constant currency basis. But for clarity and comparability, we've adjusted the return for this year from last year. So I'm going to refer to the underlying constant currency rates for the rest of this script. On an underlying basis, we also delivered a strong sales growth of 21% across the group. This was driven notably with a very strong performance in the UK, an improvement in the U. S. Growth rate and a solid performance in the EU market. That was most notable with a much improved performance in Germany. Our active customer base has grown well again with a further 1,200,000 customers since H1, taking the total to 26,100,000 active And pleasingly, we've seen a reduction in churn rate in our biggest market in the U. K. You'll be aware of the uncertainty in lockdown due to rising new variants and uncertainty around holiday prospects. This has meant a more unpredictable trading environment for fashion. The changing environment combined with the seasonal weather has made an uneven frustrating by customers, but it's also meant it has been difficult to plan their lives and their wardrobe choices accordingly. Just to illuminate this, as an example, we saw surges for Coke 1 week up 77%. And then the following week, we saw dresses up triple digit. In spite of that, I'd love to thank the ASOS team for an credible resilience and agility in helping us navigate this uncertain trading pattern. This of course has not been about challenges. Across the industry, we've seen continued pressures on the global supply chain with global capacity shortages and an increase in delivery days for shipments coming out of key ports. Moving on to Topshop. I'm pleased to say the brands continue to perform strongly with sustained triple digit sales growth since the acquisition. We see a continued step up in visits in the customer since the customer relaunch and in currency we see a sustained increase in total visits across U. S, U. K. And Germany. This has been particularly strong in the U. K. With visits for Topshop products growing at more than double the rate we saw pre acquisition. People. We're also seeing a highly engaged Topshop customer who has both high frequency and higher ABV than Air being ASOS customers. I'm sure you saw it, but we're delighted to announce and we did on Monday that we've agreed a partnership with the U. S.-based multichannel retail in Nordstrom. This will drive growth in North America for us. This joint venture Through this joint venture, Nordstrom will acquire minority interest in the Topshop top man in Southbridge and Sys Brown. Nordstrom has a strong history with Topshop being the 1st U. S. Retailer to offer brands in the U. S. Market as far back as 2012 and understands the brand and the customer well. And we look forward to partnering together to build out an exciting future for these events. Nordstrom also has unrivaled physical and digital regions in North America with more than 350 physical stores alongside online platforms that attract almost 2,000,000,000 annual visits. The investment in Nordstrom also underpinned a wider strategic partnership. This partnership will see ASOS debut in its 1st ever in store business. It can be the best of Atos Design, Collusion and the AZU brands, which we'll be launching in selected Nordstrom Stores under krostenordstrom.com. I'll now hand over to Matt for you through a couple of the key financial and operational highlights. Thanks, Nick, and good morning, everybody. I'll start by taking you through the territory performance before moving on to gross margin and then I'll wrap up by talking to the outlook. As Nick mentioned, we saw strong performance in the U. K. With 36% growth despite physical retail reopening in early April underpinned by a strong promotional calendar to catch the available demand. Towards the end of the period, the unseasonal weather combined with continued COVID uncertainty and the increasing acceptance to overseas holidays and major events not going to be a reality for most 20 something's contributed to increased volatility and an overall slowing of demand. We saw good growth in Europe of 15% despite initially slow vaccine rollout and varying levels of COVID restrictions in place across the And Brexit related delays from the U. K. To Europe impacting on our supply chain flexibility and increasing product lead times. As an example, what used to take us 4 days now takes 20 days in terms of product from the U. K. To our German warehouse. Our share held up reflecting the resonance of our strong product software and customer experience among consumers. Performance is particularly good in Germany, although Southern Europe continues to be challenging with tourism related economic pressures disproportionately impacting 20 somethings. Pleasingly, we saw improvement in U. S. Growth rates of 20 percent, which reflects our improved stock offer supported by stimulus checks and the removal of a significant number of COVID restrictions. Lastly, rest of world trading declined 3% impacted by COVID related disruptions to our delivery proposition in comparison to local competition with Russia, Australia and MENA all impacted. At H1, we noted the increase in the promotion Promotionally intense environment and this trend continued in the period. Turning now to gross margin, which reduced by 150 basis points compared to the same period last year. You'll recall that our half year walked through a bridge of the various moving parts within gross margins, which comprised of FX and freight headwinds, change in product mix. These elements were broadly similar for P3 with continued FX headwinds in line with H1 along with freight and duty, which which continued due to the global supply chain challenges along with Brexit related impacts. Moving now to product mix. Encouragingly, we are starting to see consumer demand shift back into our strong going out offer. In the U. K, whilst our casual wear business remains strong, we have in an increasing shift into occasion wear since the listing of restrictions. Our return rates have tracked in line with this shift back back into occasion where and are normalizing at an increasing rate. We see similar trends across the U. S. And most of our European territories with Germany the most pronounced. Turning now to the outlook. Firstly, a couple of specific points. You'll recall that We issued a £500,000,000 convertible bond in April of this year with a 0.75% coupon. Some of you have already put this into your model, but it It's worth flagging that this represents a £6,000,000 interest charge in this year and a £17,000,000 interest charge for next year, which will need to which PBT numbers will need to be adjusted for. Other than that, our full year PBT outlook remains in line with expectations. In terms of CapEx, all key investment projects are on track. However, we have been able to improve the spending of our spend between years, which means our CapEx number for this year is expected to be circa £160,000,000 We also expect return rates to continue to normalize at an increasing rate in line with the continued shift back into occasion where. And lastly, we expect global freight issues to remain a challenge going forward. As mentioned earlier, we saw a softening in the final weeks in June, largely driven by continued COVID uncertainty and unseasonal weather. As we sit here today, we expect the characteristics of recent trading to continue for the balance of the year. And as a result, we expect P4 growth the P4 growth rate to be broadly in line with the prior comparable period on an underlying constant currency basis. This has been a year that we consistently called out that there will be an increase in volatility. We've certainly seen that step up. And against this backdrop, we're pleased that our Your PBT outlook remains unchanged. And within that, we continue to invest for the long term. Thanks, Matt. As Matt just said, We're going to continue to invest in our business across our unique ASOS brands, our ASOS platform and our HSX experience. All this will be continues to be powered by our resources, by improving technology and our enhanced global warehouse capability. We strongly believe the structure of the global e commerce fashion market has changed forever. This will drive an increase in online fashion sales over the long term. And We're continually investing in our business to achieve that opportunity. I'd now like to hand over to questions, operator. Thank Our first question comes from Jon Stevenson From Peel Hunt, John, please go ahead. Hi, thanks. Good morning, everyone. I have two questions for me, please. Firstly, on Actives, it looks like That's 5% increase on the headline numbers you put out this morning. Can you talk a little bit about sort of signs of improving churn and how that The growth is in the States and Europe and how that's been changing. And the second question is just on the sort of normality trade. And then if you can give, again, a little bit more different in terms of how mix and return rates have changed over the territories and maybe give a sense of how close to normal we are now. Good morning, John. I'll now pick up both of their questions. Hi, John. Good morning. On active customers, so I think I mean, our active customer base by territory, I guess, kind of reflects The trading broadly the trading performance, so there's other than the kind of the strength in churn Or improvement in churn that we've seen in the U. K. I would say that the performance has been fairly similar across the territories. So, there's probably nothing notable to call out there. It kind of reflects the overall performance that we've talked about today. In terms of product Product mix and returns rates. So product mix is I guess the best way to ask is, if you look to F-nineteen levels as a proxy for or pre pandemic and you look to S-twenty as a or certainly S-twenty second half as a proxy for kind of The heart of the pandemic. The reality is that product mix is somewhere in between those 2. And I think that reflects where Consumers are consumers have significantly more freedom in most territories than they did this time last year, But people are still far from living normal lives as I'm sure everyone on the call will recognize. And our product mix reflects that Returns rates are on a similar trajectory. They're not back to pre pandemic levels, but they're also not where they were at the half of the pandemic. So our expectation is over time that those things will both continue to kind of go back towards more normal levels. It's hard to know what normal looks like I guess and particularly over what time frame that's going to happen. And as we flag today, Consumers are living in very uncertain times and their behavior reflects that. Just one thing on active customers. Okay. One thing on active customers, we continue to see a very strong increase in our premier customers and that's ahead of actual active customers as well. So we're not going to give those numbers out. But in terms of color, Our active customers and our sorry, our private customer membership is growing faster than our active customers. And that's most notable in U. K. And U. S. Okay. That's pretty nice. That's helpful. Thank you. Cheers. Our next question comes from Rebecca McClellan From Santander, Rebecca, please go ahead. Yes. Hi. Good morning. Can you just talk a little bit more about the Southern Europe, what's Going on there. I think previously you said it was mainly Spain. And is it a broader thing now? And could you give us an idea of Perhaps the weakness in demand that you've seen. And then finally, as tourism does open up, would you expect there to be some sort of underpinning of the trend? Sure. Good morning, Rebecca. Good morning. Let me give you an update. Matt will give you a couple of details. In Europe, we have seen the strongest growth continue in France and a much improved performance in Germany. And we're very pleased about that. But we have seen a very poor demand profile in Italy, Spain and some of the other parts of Europe for probably the best part of the last a few months. So that is a key trend to call out. Matt, anything you want to add? I mean, I guess, Rebecca, we do think The situation is related to the income associated with tourism. So I guess if it does pick up, We would expect that to have an impact. I guess the challenge is calling with certainty whether it is going to pick up or it's not going to pick up is quite difficult. You'll know obviously the U. K. Put the Vale Eric back on the Amber list and Germany and France have both said that their tourists shouldn't visit Spain. So I think we're trying to call it as we see it today. I think one of the challenges we've had in this and in other statements is known with any clarity Kind of what the market of things is going to do going forward. I mean, where that's happening certainly should pick up. Yes. At this time of the year, normally people are thinking about the holidays, the holiday outfits, at festivals, their events, all those kind of fashion choices are certainly being delayed. Whether they will come back with we'll get our Monday onwards Looks a little bit questionable at this point in time, Rebecca. Thank you. Our next question comes from Simon Bona from Numis. Simon, please go ahead. Hi, good morning. You spoke towards kind of the end of the call around kind of continuing to put investment into the business to grow into the opportunity ahead of you. Can you just give a bit of color on where some of that investment fell during P3 and And where your immediate plans are for that to go? I guess kind of whether that's in kind of pricing, marketing or other aspects of the proposition? Yes. Simon, I'll do that. So certainly, I mean, we flagged the half year of the investment we were making And that will have been a feature throughout the course of P3 and we would expect that investment to continue into P4. So that is A good proportion of where that investment is going. We have also continued to invest in marketing where we see the opportunity. And So, they've been the 2 big elements of investment, but we're also, I guess, building out capability in a number of different areas in technology, although most of that investment was sitting CapEx as you know. So we are continuing to invest in all of the elements of the business. But I guess where it's most notably We're going to hit the P and L. It's that investment in pricing and the marketing spend. Okay. Thank you. Back down. We now have a question from Michael Benedict from Berenberg. Michael, please go ahead. Good morning all. Thanks very much for taking my questions. Just a couple from me please. Appreciate the circumstances over the back end of June were Unfavorable. But I wondered if you could give some color on how you're thinking about, I guess, the coming weeks with lockdown restrictions in the U. K. Ending. Clearly, the weather is improving day by day. And then the second one, just on your priorities for the cash from the convertible bond raise, so you're interested to see your thoughts there. Sure. Let me have a go at that, Michael. Good morning. So what we've attempted to do and always intend to do is It's just telling you clearly how we're seeing things and set our expectations. So you can see what we're experiencing and the more We continue to do that again this morning. We always thought there's going to be a moment where there's going to be volatility And it kind of has been extremely so in June. In terms of the balance of the year, we call it as best we can. It's a short period. The weather does improve in the U. K. And people do feel more able to travel as more events come on. That would be really helpful. It's a short period. And so but by all means, they're going to be extremely helpful for us. So what was your second question, Mike? Just on the priorities for cash from those convertibles, yes. Sure. So back in April when we did the convertible, we had 2 priorities to enhance our flexibility to accelerate our organic growth, I. E. Invest harder and more. And secondly, to give us the agility to pick up any acquisitions that would help turbocharge our growth where necessary and where we thought the opportunity arise. One of the things we learned through the Topshop acquisition is having the agility through cash meaning you can actually move quickly and get assets if you want them. Now of course, there's a very high bar we apply on those. They've got to be 20 something. They've got to be core categories. We've got to have geographical expansion and have got a strong because we've got geographical expansion and have got a strong ROI. So those are the two principal reasons why we raised that money and they remain consistent today. Our next question comes from Simon Irwin from Credit Suisse. Simon, please go ahead. Good morning, guys. Two questions for you. Firstly, can you just talk us through kind of where we are with TGR in terms of The kind of rollout, what you're finding, where you're able to kind of switch off legacy systems, etcetera. And secondly, just going back to the question on active customers. Do you know how much Of the increase in recent quarters has been down to former Topshop or Arcadia customers. Do you think you've kind of milked that opportunity yet? Or is there still a kind of big list of people that you've kind of yet to approach? Okay. CGR went live several months ago. The old systems are being retired and it's Working extremely well, no issues whatsoever. The planning, all these books next season, planning has been done on it. And so that's been extremely successful implementation. What's important about that is then that moves our attention for us to invest more heavily in our platform on capability. We haven't mentioned our flex fulfillment program this morning, but that's something we'll be talking to you about again shortly. That's on track. And we're expected to heavily invest in that capability, that platform to improve our connection with our customers and the ability to scale our top line faster than the requirements of landing more distribution centers. In terms of the active customers, Matt can give you some numbers if he's got them. But we haven't yet exploited top shop, top man brand to its full potential. And so we are expecting far more of those, particularly with North America and particularly within Germany. If you recall when we acquired Topshop, we said the following. In 2019, that was a £1,000,000,000 brand. We acquired it for or €265,000,000 plus some stock on top of that. Our plan is to return that to £1,000,000,000 anchored in North America, actually also in the U. K. And then in Europe. And so what we're building with Nordstrom It isn't just a wholesale relationship. We're building a multichannel multiple that So we'll have B2C, reverse B2C, leveraging their capabilities, leveraging their data, leveraging their stock pools, But more importantly for ASOS, leveraging their eyeballs. Think about $10,000,000,000 worth of eyeballs going to ASOS Brands and Topshop Topman Brands with our full offer in North America. So our target is to return the Topshop Topman Brands to the 2019 revenues with a digital first offer and or managed by the store offer in Northern Ireland. Okay. And the product you're supplying to Nordstrom is going to be sold To them as wholesale customers. Is that correct? Or is it some kind of franchise or marketplace type of deal? So the joint venture with Topshop Topman Brands, which is that they've invested in, It will be sold to them as a commercial margin and the ASOS Design will be sold at commercial margin too. Does that answer your question, Tommy? Yes. No, that's fine. Thank you very much. Thank you. The next question comes from Charlie Mersand from Exane BNP Paribas. Charlie, please go ahead. Thanks for taking my questions. Given the slowdown you flagged in recent weeks and the volatility by category, Obviously, counterbalanced by the fact you're talking about delays getting entry in. What's your view on how clean you'll be able to exit this year or the summer season collections. Secondly, related to that, If you hit that PBT that you're anticipating, can you give us a rough indication of where you might be for net cash, please? Matt, jump it lower? Yes. So on the cash, Charlie, our guidance is unchanged from half year. So It's overall we talked about being cash positive in the second half of the year. And also that other than the unwind of the working capital that we'd like at the start of the year, we'd expect The capital positive over the full year. So the monthly expectations are broadly unchanged. There will be any link I suppose to Elizabeth, to your first question, the only uncertainty, I guess, around cash will be exactly when we bring product in for peak and the exact timing of that with the global Supply chain pressures as they are, it's possible that could have a cash flow favorable impact if it comes in slightly later. Obviously, we're looking to do everything we can to secure that product and in my end, I would just like kind of working capital move. But other than that, I guess that's all kind of encompassed within the guidance. From a exit in terms of stock, we're proactively managing the volatility on our stock And we're using actually Neil was talking about TGR. One of the flexibilities that TGR gives us is an ability to be More dynamic and more targeted is how we do that. So at this stage, I'm relatively comfortable with where we're likely to exit the year. But notwithstanding the fact we still got 7 weeks of trade less to go. So I'm comfortable at this stage, but clearly the volatility is making that Harder rather than easier, but it's not that we've got the tools that have had available to handle it. Charlie, the main priority we did now is we've set that up on the end of the year. And we're already planning It was a winter and into the results up to do a great auto winter We're doing with Our next question comes from Olivia Townsend from UBS. Olivia, please go ahead. Hi, everyone. Thanks for taking my questions. Just on P3, I was wondering if you could give a bit more information on the other KPIs during the period. Am I right in thinking the basket size should have improved And anything on order frequency as well? And then my second question is just on some of those gross margin pressures that you were referring to in the statement. I'm just wondering how much visibility do you have on things like freight costs into next year? I'm thinking kind of length of contract, Timing of renegotiations, that kind of thing. Thanks. I can pick those up. So just in terms of freight, so I mean we do have contracts in place, but my expectation based on everything we know today Is that freight rates are likely to remain elevated at least for the rest of this calendar year? But It is fast moving. I'm also aware that a number of the big shipping companies are looking to inject significant amount of capacity into the system. So, I think it's unrealistic to expect that they will materially improve between now and the end of the year. I'm hopeful that once we get past the peak trading period that we will start to see those pressures alleviate quite significantly. But it's a very dynamic situation. And I could be proven wrong on the upside or on the downside. In terms of the broader KPI set, Yes, we've seen some improvement in average basket values, albeit given Some of the trends that Nick was referring to perhaps not as much as we might expect in recent weeks. Frequency is definitely positive and probably particularly outside of the UK. I guess what we've experienced over the last almost 18 months since the pandemic started is that The less frequent shoppers are probably the shoppers who've chosen not to shop. But what you've been seeing is our most engaged customers everywhere We continue to engage. And therefore, our overall frequency and quality of customer base has probably gone up over the last 18 months. And I think as we refer to a half year, the customers we've acquired through the pandemic Appears to be on the whole at least as good as, if not slightly better than our existing customer base. So I think the underlying dynamics on the customer base are reasonably positive. But again, We're in the kind of middle of a shift from To pandemic to post pandemic, we're somewhere in the middle, so we'll know a lot more in a few months. And just to give you a comment on basket by territory. The budgets have improved on a value and a salary basis, most notably in U. K. And U. S. And in Germany and within Europe. Those are following the key trends we've called out today, Olivia. And maybe if I could just quickly follow-up on The point about freight and the capacity. So just to clarify, you have no kind of concerns about availability into Like early next year, but then we'll kind of see what happens after that in any region. Is that right? I wouldn't say no concerns. It's a challenging environment. So particularly outside of there are significant delays. But We're confident that we're doing all the right things and therefore that we'll be able to manage it. But it is challenging and there will be product shortages across the industry. But we would hope as we think we've done throughout the pandemic that we would do better rather than worse in the context of the overall market.