Asos offers sustainable online exposure

A July trading update from Asos (ASC) announced expectations of healthy full-year profit growth, despite weak consumer sentiment and against a backdrop of growing concerns surrounding the ethics of clothing production. The retailer is riding a trend towards online shopping and has taken swift action to ensure it can both capitalise on changing consumer behaviour, and survive the coronavirus pandemic.

Asos targets ‘20-somethings’, offering them the choice of 85,000 clothing and footwear products, online, from almost any country in the world. It generates over two-thirds of revenues in the UK and European Union (EU). Recent performance was particularly impressive because lockdown badly hit product areas where Asos has traditionally been strongest, such as outfits for formal events and special occasions. However, the business was able to quickly switch tack to capitalise on strong demand for casual and athleisure clothing. 

Sales fell by as much as a quarter when restrictions were first introduced, while a shift away from its higher-margin products towards its lower-margin ones drove average selling price down by nearly a tenth in the four months to the end of June. But Asos managed to limit its gross margin decline to 70 basis points, with measures including tight stock control, reductions to non-essential costs and lower marketing expenditure. Stock availability problems, which have dogged the retailer in recent years, may persist towards the endof the year.

Overall, the retailer recorded a 9 per cent sales increase for the four months to the end of June on a constant-currency basis, with EU sales jumping a fifth as lockdown measures eased and an incentive to buy going-out clothes returned. Asos expects to register full-year pre-tax profits near the top of market forecasts and positive free cash flow, despite recent demand pressures and Covid-related costs. 

Asos bolstered its balance sheet during a period of high uncertainty in the spring. It raised £247m via a share placing in April at 1,560p, which it said at the time would secure the business for at least 18 months should trading fail to improve. Asos is now expected to finish the year in a net cash position, excluding leases. 

Following the initial Covid slump,evidence suggests consumers are becoming more comfortable with online shopping and are increasingly willing to buy clothes once more. Forty-three per cent of UK consumers surveyed by EY in June said they will buy products online that they previously purchased in stores, compared with 17 per cent in May. Coronavirus remains a deterrent to visiting shops, and although the proportion of shoppers willing to try clothes on in stores has risen, this remains below a fifth of consumers. 

What’s more, despite the onset of economic recession and a likely tightening of consumer finances, 22 per cent of shoppers now plan on spending more on clothes and shoes. Asos will hope that the reopening of the hospitality sector and a return to socialising will shift its product mix back towards higher-margin items.

Asos rival Boohoo’s (BOO) shares cratered last month following allegations of poor working practices in its UK supply chain. The malpractice was alleged to have taken place in a Leicester factory, an area that has been dogged by reports of sweatshop activity. 

Asos, which unlike Boohoo publishes a list of its suppliers, has also used Leicester-based suppliers, but has culled a number of manufacturers from its global supply chain over the years on ethical grounds. It ranked ninth out of 250 in the Fashion Transparency Index’s 2020 league of clothing companies with a transparency score of 55 per cent, compared with Boohoo’s 9 per cent. Asos has also made significant strides on sustainability, including the launch last year of a website filter for responsible clothing, helping customers find items that have been made from recycled or sustainable materials.