Struggling Asos commits to leaner inventory model

Inventory problems are nothing new at fast fashion group Asos (ASC) – but there are signs that it may (finally) be running down its sizeable stocks. At the end of the first half, the retailer had £593mn of unsold merchandise against a full-year objective of £600mn, meaning planned reductions are running ahead of schedule. 

It mostly achieved the cuts via heavy discounting, which resulted in its adjusted gross margin falling 260 basis points to 40.3 per cent. Approximately half of the total stock reduction achieved in the first half came from the clearance of items more than one year old. 

Management is planning further clearance activity for the remainder of the financial year to “unlock the full benefit of the new commercial model from [FY 2025]”. This model, dubbed “test & react”, involves bringing stock into the business on a two-to-three week lead time. It’s designed to reduce stock risk, because shorter lead times enable lower initial purchase orders on the group’s own-brand products. 

Asos is also planning to adopt a stockless model for the partner brands it sells on its platform. Investors seem reasonably optimistic about the changes, with the group’s shares ticking upward by around 4 per cent on the morning it published its interim figures. It helps that the company also posted its strongest first-half cash generation since 2017.

But in the short term, top-line growth is well out of reach. Management has reiterated guidance for a sales decline of 5 to 15 per cent for the full financial year. We will therefore retain our sell rating for now.

Last IC view: Sell, 354p, 1 November 2023