Trading Update

Jan 23, 2020

Earnings release

Ladies and gentlemen, welcome to the ASOS P1 Trading Update hosted by CEO, Nick Baten and CFO, Matt Dunn. My name is Joshua, and I'll be your conference coordinator for today's call. At the end of today's presentation, you will have the opportunity to ask your question should you wish to do so. I will I'll now hand over to Nick Batin. Nick, please go ahead. Thank you, operator. Good morning, everyone, and thanks for joining our call for P1 trading update. It of course covers the 4 months through 31st December. We're aiming to keep it relatively short as it's still very early in the financial year. In terms of format, I'll start with an overview and an update on progress we're making against our key priorities, the ones we set out in October before handing over to Matt, and then of course, we'll take questions at the end. So let me start with a quick overview. This is an important period for ASOS. With our warehouse transition issues behind us, we're outcome. Revenue was up 20% with good growth coming from all our territories. Within this, we had a record Black Friday, which surpassed our own expectations. The rest of the period played out broadly as we expected. Looking a little bit more detail on Black Friday performance. At peak, we were taking almost 2,000 orders per minute, and our warehouses handled record order volumes. Our trading stance was focused on maximizing customer acquisition and the improvements we've been making in product choice, product availability and product presentation. This led to very strong customer engagement. This is also underpinned by a robust operational performance across all our warehouses and technology. You'll hopefully remember the priorities we laid out in October. These are aimed at further enhancing our capabilities and leveraging the investments we've been making. 4 months in, I'm pleased to say we've already made good progress. To give you an idea of this, I want to pull out a couple of highlights for you. Our product newness is up 19% versus last year, reflecting our focus on increased product choice. This has really resonated well with our customers. Together with good stock availability, it helps support our performance. In terms of customer engagement, momentum was much improved. Traffic was strong with visits up 23%. We added 1,400,000 active customers to our base in the 1st 4 months of the year, which came particularly at the younger demographic, importantly, our customer sweet spot. We've seen the strongest year on year growth and active customers aged under 25. Our focus for the rest of the year is to build on this, retain the customers and require more during the course of the year. As you'll be aware, one of our other priorities is to leverage the benefits of our investment. At Ensys, we're really pleased on how our automated Eurohub stepped up to support record Black Friday volume, with notable improvements in pig rate. We're also really pleased with the resilience of Atlanta and how well it handled PIG for the first time. Looking at the remainder of the year, we always expected P1 to be our strongest period of growth given our focus on customer acquisition. Therefore, while we're encouraged by this early performance, we haven't seen anything that will cause us to change the outlook for the rest of the year. I'm now going to hand over to Matt, who will give you a little bit more detail on the regional performance. Thanks, Nick, and good morning, everybody. Starting with the U. K, we saw a strong performance with sales up 18%, which was slightly ahead of our expectations, supported by the actions we took to rebuild customer momentum and our trading starts around Black Friday. Particularly pleasing was the trajectory we saw in business growth. Except on again from the improvement we saw in the back half last year, which is testament to how well the changes we are making are resonating with customers. Looking forward, given the scale we have now reached, we think it is likely that the rate of growth in our home market will begin to moderate at some point. Moving on to Europe, with our warehouse automation issues behind us and product availability correspondingly restored, we delivered a strong sales performance, up 21% as the gap between visits and orders growth narrowed and conversion stepped back to be flat on the year. We now have 1,100,000 more active customers in Europe than this time last year and are pleased with the progress we have made in reactivating customers. Turning to the U. S. We have made good progress with increasing the witness stock in our Atlanta warehouse, and we saw this translate into both healthy orders and to this group, resulted in sales increasing by 23%. We're still trading with a high proportion of market share stock in the U. S. As we continue to clear through some of the older stock that go up through our warehouse transition phase. Finally, in the Rest of the World. It's worth pointing out here that we didn't participate in Black Friday in our 2 main Rest of World territories last year, Russia and Australia, and that certainly supported our year on year growth this year. Notwithstanding that, our performance in the region was solid at +23 despite disruption in both Hong Kong and Australia, and active customer growth was pleasing. Turning now to gross margin. It was back 170 basis points with 2 key drivers, both of which we flagged in October as our full year results. The first of which was the increased U. S. Duty as a result of fulfilling from our Atlanta warehouse and the second was an investment in customer acquisition, including reactivating customers in the U. S. And EU. The investment here was slightly higher than we expected, which was due to a greater than expected uptake from our customers during Black Friday rather than any unplanned change to the level of promotion. Before I hand back to Nick, I wanted to touch on a couple of other points. As you'll be aware from following the sector, Black Friday is clearly becoming an increasingly important customer moment, with traditional sales periods perhaps resonating less with customers than they once did. We are noticing the continued trend of pull forward into Black Friday and therefore think it is important to look at the first half as a whole and show a complete picture of performance through the peak trading period. Another point I wanted to note was foreign exchange, given the movement in the strength of the pound since we last reported to you. As a net seller's foreign currency, FX has been a tailwind for us for the last couple of years. As most of you will remember, we hedge our major currencies on a net cash flow basis designated against sales. Therefore, for the P and L as a whole, any large moves in the pound against our key currencies, most notably the euro, will feed slowly through as our hedges roll off. We do have a number of options to reduce this future exposure, which is something we are cognizant is a medium term headwind. More near term, we will feel an impact from the emerging market currencies we don't hedge out as far, most notably the Russian ruble. Our comment and outlook reflect the movements we've seen to date, but it's something to be mindful of and we will give you a more detailed update on foreign exchange at our half year results. I'll now hand back to Nick to wrap up. Thanks, Matt. I'd like to thank you all again for joining the call before I sign off and hand over to questions. Our performance over the 1st 4 months certainly represents an encouraging start to the year, But we're very clear that there's much more work to be done, both on our priorities we set out for our consistent long term growth as well as working to build and retain the customers we have recently acquired. I look forward to updating you all again on our further progress at the half year results. I'd now like to hand over to questions, please. Operator? The first question on the line comes from David Holmes from Bank of America Merrill Lynch. David, your line is now open. Good morning, guys. Thanks for taking my questions. Couple on the gross margin. I guess, first one is, can you give us a sense of where that promotional activity was focused regionally? And then secondly, you've called out the 2 drivers, the promotional activity and the U. S. Duties. Any sense of the magnitude of both those key drivers? Hi, David. I'll answer that. So in terms of the overall 170 basis points, the U. S. Duty impact was by far the most significant impact. So that was the principal driver. In terms of the investment, it was broad based across all the regions. But as you can imagine, the EU and U. S. Were probably within the mix slightly higher given our stated intent to reacquire customers in those territories. Understood. Thank you very much. The next question on the line comes from Simon Irwin from Credit Suisse. Simon, your line is now open. Good trading period. Could you just talk about some individual categories in terms of how ASOS Design worked and how footwear, particularly, sportswear went and that they were clearly issues in the prior period? Yes, of course. ASOS Design, both menswear and womenswear grew much stronger than the top line performance, which we're really pleased about. Within that, ASOS 4,505 performed extremely well and has continued to build on from the launch of 2 years ago. Our ranges have got better, our fabrications got better, our styling has got better. Within that, footwear had a trickier start, ended the year extremely well with new trends coming through both on ASOS Design and on branded footwear. So I'm pleased to say those categories have worked really well for us. On 2 other categories that you haven't mentioned specifically that I'd like to call out, ASOS Collusion that was launched a little over 18 months ago has continued to perform extremely well, resonating with young consumers, and it's firmly in the top 10 brands nose wigs. And also, we continue to build resonance and traction with our consumers on face and body. So that's just a quick tour around all the categories. Right now, we're looking forward to a stronger bridal wear season. Some of our bridal wear ranges are extremely compelling in terms of fashion, styling and price points. And we've had tens of thousands of brides choose to wear ASOS down the aisle for the first time, which is something that we are very pleased about. Great. So the conclusion from that is that in terms of margin mix, that overall mix should be quite positive? Well, you know ASOS Design has a stronger margin than brands, but equally, face and body is a lower margin than incremental items to the basket. The next question comes from Michelle Wilson from Berenberg. Michelle, your line is now open. Hi, good morning. Hi, Michelle. Good morning. So first of all, just on the 1,400,000 active customer adds. Could you give us a bit of a background on what's driving that with retention rates or predominantly coming from new customers? And just whether there's any change in marketing strategy? And one on the U. K. Growth, you mentioned that you're expecting U. K. Growth to moderate. Have you actually seen a slowdown in customer acquisition over P1 that causes you to think that's happening soon? And then thirdly, has that very strong Q1 performance, is there any issue around stock availability heading into the sale period in Q2 that we should be aware of? I'll start off with the first couple of those. The 1,400,000 customers we acquired during the 1st 4 months, we're very happy with. You'll know that we acquired 1.9 for the whole of last year. I was most pleased about our acquisition in the younger demographic. That was up substantially greater than the 15% for the entire group. Now one of the things we have done with that is we've sharpened our ranges, we've sharpened our newness, we've sharpened our presentation And we also pulled forward an awful lot of compelling promotions, targeted at that particular demographic. So those are the areas where we've seen the most growth. And actually, it's been across all territories, not just U. K. In terms of the comment on the U. K. Growth rate, this quarter has again surprised us on how strong sorry, it's on the customers. I forgot to mention, we've seen both strong new customer acquisition and also strong reactivation and therefore, a lowering of the churn rate. So that's a very pleasing trend across all dynamics. In terms of U. K. Growth, we were surprised about how robust it was. It was ahead of our internal expectations in the U. K. At some point, as I've been on record before, that growth rate has to moderate given the size of the UK business, the size of the opportunity and mass getting in the way. In terms of stock, Matt, do you want to pick up anything on that? Yes. So I mean whilst Black Friday was slightly ahead of our expectations, in terms of the flexibility of our spot management, there's nothing worried about from a spot availability perspective going into Q2. Clearly, the balances are flagged in my kind of remarks between Black Friday and the January, February period and particularly the clearance element of that. We'll have to see how it shakes out, but stock shouldn't be a problem in that context. The next question on the line is from Adam Cochrane from Citi. Adam, your line is now open. Good morning, guys. A question I've got is, if you think the you're talking previously about the number of customers that you may have to reactivate in the U. S. Or Europe because maybe they had a disappointing experience before. In terms of versus how you expected to the discounts or vouchers, however you got them back in, is that gone to plan? And secondly, if you've reactivated those customers, have you seen enough time to track how their purchasing behavior? Have they gone back to where it was before the disruption? Or have they just sort of did the first sale or bought something because of the promotional activity? I think I know where you're going. The question there is how would the newly acquired customers translate their behavior to the acquisition. Well, with that, it's still early days to determine what the ongoing quality of the database has been through that acquisition. But what I do know from experience is acquiring them in the sweet spot and seeing an underlying increased improvement in premium membership gives us a good and early indication of the quality of those data of that customer database. But we will need a lot longer to see how that behavior translate to the rest of the year. Does that help? And in terms of Yes. What was the reactivated ones? Well, the reactivation period most definitely is around the biggest one in the year is November. And so that's 6 weeks passed. So we just need a bit more time to see how that reactivation continues. In terms of activating customers in Europe and U. S, we're very happy with how those were reactivated and very happy with the resulting growth that came from those territories. In terms of other than the sort of sales metrics, the amount of feedback you get via other channels, have the customer feedback been in terms of this period? Have you had very positive social media or other, is there feedback from them now that you're back to normal, let's call it? So there's a couple of measures that Matt and I look at very regularly to assess those things. 1's our Net Promoter Score and the other 2 are Trustpilot scores and CSAT scores. Trustpilot, over the last 6 months, has improved its rating substantially, as have CSAT. Now those are quite early indicators of customer experience. NPS scores have leveled out, and we're looking for an improvement at the back end of this year. The next question comes from Simon Bowler from Numis. Hi, morning all. A couple of questions for myself. First of all, just when you talk about customer acquisition, can you perhaps elaborate on how much kind of went into the marketing for the operating cost side of things? Apologies about the background clapping, that was not really my question. And then the second piece is just regards to the gross margin because there's volatility in kind of Q3, Q2 as reported last year. I was just wondering if you can give us a sense of what the clean base was for the 4 month period, so we can put this month, this year's performance into context? I think Matt's going to answer both of those. Yes. So I mean in terms of marketing costs, clearly, it's not a number we've given, and we'll give a full view of the P and L in a couple of months. If we were if you've seen anything significant change in the trajectory, we would have called out today. So you can assume that the trajectory is more is relatively normal. We continue to invest in line with the growth we've seen broadly. In terms of gross margin, again, I'm not going to give numbers we haven't given out before. So let's clarify that at the half year. I think it'd be easier to show you that full period at the half year and you'll get a read of the trend then. Okay. Is it possible to ask the second question in a different way in terms of should we expect kind of any material change in that kind of gross margin shape across the final 2 months of the year? Or should I just shut up and wait for incidents? Well, no, I think that I can answer, Simon. So I probably meant it. So I think clearly, it reflects the biggest driver of the gross margin movement has been the investment in the duty as we move into a U. S. Warehouse. We should expect that to continue through the vast majority of the January February period because we only ramped up the warehouse at the end of February. So in that sense, I wouldn't expect a significant shift in trend. The other moving parts will obviously depend on our trading from here to there, but I'm not expecting any material shifts in the rest of the first half. As we move into the second half with the U. S. Duty in the basin, I would expect to start to see a shift in trend as we move into the second half. Okay. Thank you. The next question on the line comes from Tushar Jain from Goldman Sachs. Tushar, your line is now open. Hi, good morning guys. Two questions from my side. First one, basket size, if you can give us a color how basket size trended, especially in Europe and U. S. Given better choice and product availability? And second question on U. S, I mean, gross margins are declining. Can you confirm if the distribution cost is broadly offsetting that decline in the gross margins to this year? Thank you. So let me deal with both of those Tushar and I'll deal with the gross margin on first. So absolutely, as we indicated at the full year, we are seeing that duty cost largely offset by the distribution savings or the delivery savings that we're seeing. So profitability point of view, the impact will be much less significant than that you're seeing in gross profit. Again, I'm not going to give you a specific ABV number. I think the trends are very much as we outlined, they would be at the full year. Therefore, as we start to get into better levels of availability, we are starting to see that result in the right trend from an ABV perspective. We'll obviously give details at half year, but I guess we're not seeing anything that we would not expect to see as we flagged at the full year. The next question on the line comes from Jon Stevenson from Peel Hunt. Jon, your line is now open. Good morning. Two questions for me, please. Can you comment on the breadth of the branded U. S. Offer you had going into peak versus where you might have hoped you would have been 6 to 12 months ago? And maybe comment on how the U. S. Range is going to build over the next, say, 12 months? Also, can you talk on current thinking around EU pricing levels? I think you previously stated that you wanted to trade before you took a decision on whether there's need for sort of further underlying investment in price in the EU territory. And then my final, obviously, various approaches to promo and the recruitment going into peak. How is that sort of shaping your thoughts for how you're going to operate in the year ahead? Okay. Branded WIP versus all or U. S. First of all, some of the strongest growth we've seen in the U. S. Accretively come from the ASOS design. And that's something that's very satisfying for us and one that we are pleased about. The branded width hit the target we were looking for pre October, which was evident in the overall performance. There's still a lot more brands that we think we can build into the U. S. Offer and we're working hard on that. But we hit our target, we hit our plan, but the thing I'm most pleased about in the U. S. Has been the ASOS design growth, which is stronger than the overall company growth we reported. In terms of EU pricing, you're absolutely right. I'm not going to give you a clue on what we're going to do right now apart from we are looking at it now and deciding the level of investment we will or will not make. So that's something we'll give you more clarity on when we've made that call. In terms of promo mechanics, during September, October November, we experimented with very different ways of attracting customers. And all of those were very successful. And we're very pleased with the results we had. Now what you've got to do with all of these is keep it fresh, keep it relevant, keep it timely. All of the promos only work when it's anchored with great products, great presentation and great newness and, of course, decent availability. So we'll continue to experiment with all of those. We'll have a good look at a good think about that one now, and we'll probably shape out a different trading plan for the rest of the year when we've got to it. Okay. All right. So more of the interim, yes? Sorry, John, say again, mate. Sorry, I just wanted to bring a bit more detail at the interim then. Yes, indeed. Lovely. Thank you. All right. Cheers, guys. Thank you. Cheers. The next question on the line comes from Anne Critchley from SG. SG. Two questions from me, please. So thinking about the comments you made on FX, could you tell us what your operating cost is, by the main currencies now having opened an Atlanta warehouse? And then the second question is on the sales run rate in the U. K. Underlying. Was there a huge spike around Black Friday? And if you split Black Friday out, what would the run rate have been compared to that 18%? Matt's going to answer both of those for you, Anne. Thank you. Let me deal with FX. So I mean, I won't give you exact numbers, Ann. I mean, just in terms of our operating costs split, our warehousing costs are now broadly aligned with our sales performance in terms of the split. In the sense obviously, with the European warehouse, for our Eurohub territories and the U. S. Warehouse for our U. S. Territories, I guess, where if there's any degree of misalignment at all, it will obviously be the pharmacy services, the whole of rest of world, particularly those emerging market territories. Our the rest of our cost base delivery costs are largely in local currency where we have them, it will depend on the lanes, etcetera. And then obviously, our fixed cost base is predominantly in the U. K. So it kind of gives you a feel we're weighted towards the U. K, But we as time moves on, obviously, more and more of our costs are being put into local currency as we kind of stand up those local operations. And then from a sales run rate perspective, we saw good momentum in the U. K. Throughout the whole peak period. In fact, there were a number of events, for example, that we ran in the U. K. For the first time. So we really Singles Day, which is obviously a phenomenon that's big in Asia, but as it's been less big in the UK, we did do something in the UK. So yes, definitely Black Friday was probably the greatest growth rate, but we saw good underlying momentum throughout the period. The next question on the line is from Emily Coolidge from Redburn. Emily, your line is now open. Hi there. So on gross margin, you've obviously pulled out some of the drag for the USGT and the investment in the customer acquisition. But could you perhaps talk about and hopefully quantify some of the positive impacts, so for that own labor growth, but also any discounts you've got from suppliers? You've got from suppliers? Yes. Look, I can do it. I'm afraid it's going to be a short answer, though. So we'll obviously go into more detail. I'm not going to try and break out all the moving parts at this point. I think as I flagged earlier, I think it's much better to take a view of our performance across the whole of H1 when we can break out the component parts in more detail. Okay. Thanks. The next question is from Rebecca McKillan from Santander. Rebecca, your line is open. Yes, good morning. Just a couple of questions for me, please. In terms of these FX headwinds, which have potentially emerging, is there any chance of adjusting pricing in some of your emerging markets in order to compensate for this? And secondly, you mentioned about the U. S. Markdown stock. Where are you at the close of Q1 or into Q2? Q2? So just, I mean, just on FX, absolutely, we, pricing is one of the elements of mitigation that we have. And you will see we're not unique in the fact that particularly in emerging markets, obviously, we would pricing is relatively dynamic to reflect the way that those currencies move around. So again, we'll give more color at the half year, but that's absolutely one of those things that we and in fact, we have invested in price in the last few years as we have seen the pound weaken some of those currencies. So if you look at particularly in 2017, you'll have seen the impact to our results. So you can expect us to be able to address that in some cases, but there are other mitigation opportunities as well. From a U. S. Perspective, our markdown mix is improving all the time. But in terms of relative mix of our markdown products, it's still heavier in the U. S. Warehouse than it would be in our other 2 warehouses. Clearly, January, February is a key period for clearance stock. So we're working on that right now. And therefore, as we exit H1, I would expect us to be in a relatively good position, but we'll obviously have to wait and see how we trade across the next few weeks. The next question is from Olivia Townsend from UBS. I just have two questions. So firstly, do you expect to have a concerted effort to recruit younger customers throughout the year? And then secondly, a follow-up to that. Do you see any differences in how younger customers tend to shop versus older customers or just the full cohort? Do you see them shopping more frequently? Just trying to understand if there would be an impact on basket economics. Okay. Yes, we'll continue to focus on customer acquisition and retention. Yes, we'll continue to focus on our sweet spot of 20 something too. We're building ranges that appeal to that whole demographic, but having a lot of pickup with the younger demographic, as I said earlier, and we'll continue to do more of that. It's difficult to say a younger customer does this and an older customer does that, but the clearest trend is actually the younger customers tend to be more frequent engagement, tend to be more mobile native, tend to be more engaged through Instagram, but those are really broad brush assumptions. But there's not a lot more help I can give you on that, Olivia, but I think you're probably there already. The final question for today is a follow-up from Simon Bowler. Just one quick follow-up, if that's okay. I was just wondering if you can help us think about the kind of first half, second half profit shape across the balance of this year. Yes. Again, let's finish the first half before we start commenting. But I guess what we would expect, Simon, is a shift towards that more normal first half, second half split than we saw last year. So that's the kind of where I would expect it to move towards, but let's gather at the first half trade before we can be more explicit on that. All right. I think you've got the closing curtain there, Simon, so thank you for that. Thanks again, everyone, for joining the call. I'll just reiterate what I said earlier. Our performance for the 1st 4 months is an encouraging start to the year. Clearly, there's lots more for us to do. We'll continue to work on our priorities, and we'll set out more detail where appropriate when we see the insurance in April. Have a good day, everyone, and thanks again for joining the call. Ladies and gentlemen, this does now conclude today's call.