ASOS PLC (LON:ASC) shares advanced on Wednesday after the AIM giant maintained its full-year guidance despite reporting an 87% drop in first-half pre-tax profit, largely due to warehouse costs and a higher level of discounting.
The online fashion retailer, which issued a shock profit warning in December after weak sales over Black Friday and the run-up to Christmas, said pre-tax profit fell to £4mln in the six months to February 28 from £29.9mln a year ago.
Retail gross margins fell 60 basis points (bps) to 47.4% as the company cut prices to draw in customers in a challenging UK retail market.
Total operating costs jumped 48.3% to £635.4mln as the company opened a new warehouse in Atlanta and invested in the automation of its EU hub warehouse in Berlin. Distribution costs accounted for most of the total, rising 15.6% to £204.9mln.
Operating costs to revenue increased by 170bps to 48.3%.
Group revenue increased 14% to £1.31bn with retail sales up 13% to £1.28bn.
UK retail sales gained 16% to £481.5mln and international retail sales rose 12% to £799mln.
ASOS expects performance to improve in second half
“ASOS is capable of a lot more,” said chief executive Nick Beighton.
“We have identified a number of things we can do better and are taking action accordingly.
“We are confident of an improved performance in the second half and are not changing our guidance for the year.”
ASOS spent £103.2mln on improving its technology platforms and automating warehouses to increase efficiency and save costs down the line.
The aim is to reduce warehouse costs to 8% of revenue.
ASOS expects the automation of its Euro Hub warehouse to go live later this month.
ASOS sees return to positive free cash flow in 2020
Capital expenditure is estimated to total £200mln in 2019, as previously announced, and will fall to £150mln in 2020.
“Looking to the medium term, with this phase of our capital investment in our warehouses and transformation technology nearing completion, we are confident in our ability to continue to capture market share globally, allowing us to maintain top-line performance, restore EBIT margin and accelerate positive free cash flow,” the group said.
The retailer continues to expect sales growth of 15% for the year and an underlying margin of 2%. Net debt is estimated to reach £50mln in 2019 and ASOS sees a return to positive free cash flow in 2020.
In December, ASOS cut its sales growth guidance for the year from 20-25% and halved its underlying margin forecast.
Shares rose 5.8% to 3,330p in morning trading.
Liberum hikes target price
Liberum maintained a 'hold' rating and raised its target price to 3,200p from 2,800p.
"Key actions management is taking to support an improved performance going forward is not without execution risk," the broker said.
"We increase our TP to reflect the better cash but maintain our HOLD rating given execution risk going forward, preferring a switch from ASOS into Zalando.
In afternoon trading, ASOS shares were up 7.3% to 3,379p. albeit easing back from a session peak of 3,673p.
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