ASOS PLC

LSE:ASC

Earnings Call Transcript 2023-Q2

[Jose Antonio Calamonte, executive]

Good morning, everyone. I never thought I would be too tall for a mic, but anyway. So good morning, again. Thanks for coming along to our fiscal year '23 interim results presentation and to those watching online, thanks for listening in. I'm sure many of you have already seen our results RNS this morning -- sorry, can you go back?

Thank you. So you all have seen our results as of this morning as well as our second annual Fashion With Integrity progress update. And I'm going to take you through a summary of our first half before giving you more color on our progress with our Driving Change agenda, which has been our core focus since we last spoke to you in January and since October as well. And then I'll hand over to Katy to run you through our financials in more detail. Today is Katy's last results announcement at ASOS, and I would like to take this opportunity to thank her for her hard work to the very last minute, I promise, and her valuable contribution throughout her time here, it's been a great pleasure to work with you Katy.

And I will then ask our incoming Interim CFO, Sean Glithero, I've never pronounce it really, to take us through the outlook for the year ahead before we have some time for Q&A. So with that, when I first spoke to you as CEO back in October, I set my diagnosis of our strengths and businesses, which led to the launch of our Driving Change agenda, which is an action plan to accelerate the transformation of ASOS into a profitable cash-generative business.

We are determined to do this while retaining our commitment to protect people and reduce our impact on the planet through our Fashion with Integrity program. I'm pleased to say this morning that we have made great progress over the last 6 months, creating a strong foundation for a return to profit and cash generation in the second half of the year and beyond. Against a challenging backdrop, sales in the period at constant currency and excluding Russia, declined 7% with a deterioration since P1 largely due to the impact of our profitability initiatives.

This is to be expected as we prioritize order and customer profitability over a mentality of growth at all costs. Adjusted loss before interest and tax was GBP 69.4 million, reflecting the phasing of headwinds and Driving Change benefits across fiscal year '23, which we'll give more detail on later. I am encouraged -- sorry, I'm encouraged by the progress we have made so far. We are having some technical difficulties, sorry about that. And we see if we can get back to -- and the idea is that I'm going to continue talking to the slide we have here.

Okay, so we're having an issue with the slides. And -- sorry about that. My apologies. So I'm encouraged with the progress we have made on our journey towards operational excellence so far. Thanks to the hard work and dedication of all ASOSers, we're on track to deliver over the GBP 300 million benefit of our profitability and cost savings measures this year, as we announced in October. The team has delivered over GBP 100 million of benefits in the first half and over 95% of the GBP 200 million benefits planned for H2 will come from actions that we have already taken.

The shift to our new commercial model is a core pillar of the Driving Change agenda. In this sense, I'm pleased to report that our stock reduction is ahead of plan, down by 9% in the first half of the year, and we have plans in place to reduce our stock position by around 20% by year-end. It will take time for all the benefits of this shift to flow through, but I'm pleased to see recent gross margin up more than 300 basis points year-on-year driven by some of our commercial initiatives and supported by freight and duty pricing.

At the end of February, we had cash and undrawn facilities of over GBP 400 million. And this month, we have also amended and extended our $350 million RCF facility through to November '24, supporting the business as we continue to execute our plan. Alongside our robust and flexible balance sheet, leadership and culture is a core enabler of our strategy. Over the period, we have reinforced our senior leadership team, simplified decision-making processes and empower a culture of innovation.

We have made great progress in the period, but there is still so much opportunity in this business. As we move through the second half of the year, we remain focused on the delivery of our Driving Change agenda to create strong foundations for the next phase of our growth. So hopefully, you remember the 4 pillars of the Driving Change agenda as we set it out in October. But let me remind you a little bit.

The first one was renewing our commercial model; the second was improving our order economics and removing inefficiencies in our operation; the third one was ensuring that we maintain a robust and flexible balance sheet; and last but not least, refreshing our leadership team and culture.

Now I'll talk about our progress in each of these pillars a little bit more in detail. The eagled-eye among you may recognize this slide from the full year results presentation, but I wanted to recap on our plans for the year under our renewed commercial model. The shift to the new commercial model involves first, a comprehensive change of our ASOS buying and merchandising processes and improved stock management discipline and removing complexity from our supply chain.

These actions will enable us to give our consumers the best possible experience, increasing the visibility of more relevant full-priced products. To say the benefits of our renewal commercial model is critical that we are operating with an optimized stock profile. Given the current lead times on product, there is a lag between operational changes and visible results, and I'll explain this more in detail on the next slide, but I'm pleased with the progress we have made to date. We have reduced our stock balance by 9%, as I said before, since the end of fiscal year '22, which is ahead of plan.

While this reduction has been supported, obviously, by the GBP 130 million write-off, it must be taken in the context of the challenging market backdrop and the typical stock build over the first half of the year. In addition to taking remedial action on stock, we have changed the way we manage our stock position on an ongoing basis. This enables us to be more flexible in creating and managing our assortment, meaning our customers see more relevant product, that is the end game.

To ensure continued discipline in the future, we have empowered a central merchandise planning team to oversee a more dynamic approach to stock management and develop new channels to clear stock outside of the ASOS platform in order to protect our brands and ensure our customers get the best possible experience. A key pillar of our driving change agenda is the shift to this renewed commercial model, which is both supported by -- and a driver of better stock management, that means better buying, better selling and better clearing of excess stock.

I wanted to spend a bit of time on this slide, explaining the development of our stock profile, including the three-phased approach we are taking to rightsize our inventory. Let me first give you some high-level background on our stock profile. At the onset of the pandemic, we saw a spike in demand, stock turn accelerated and inventory levels dropped. As we move through fiscal year '21 in response to demand expectations and supply chain disruption, intake was increased considerably and the stock turn declined.

And as demand fell over fiscal year '22 under the old commercial model, we did not adapt intake or clear stock quickly enough. This resulted in a buildup of excess inventory and low stock turn. In the past, we have kept passing some products on the platform for too long. We believe we could sell through all stock at breakeven or for a small profit if it was available for long enough, but this, ultimately, comes at the expense of customer experience, full price sales and profitability. The new model represents a break from this approach.

We will be more responsive. We're already more responsive to what our customers want. We will clear through stock faster and show our customers the most relevant full-priced product with my famous image, the fresh fish, if you want. Sorry to repeat it. So the 3 phases of our approach are, first -- the first stage is that the stock write-off that we did. We took a decisive action to clear GBP 130 million of excessive stock. Approximately 90% of it is now extracted from our core network, and this alongside brings a significant operational efficiencies and improving profitability in our sales.

Then the second one involves a reduction in our intake for the spring/summer '23 season that we have already implemented, obviously. Given the change took place partway through the buying cycle, the opportunity to reduce intake was predominantly actioned via a reduction in the number of options, rather volume or depth by option. This is a drag on sales, but will drive the 20% planned reduction in inventory levels by year-end.

The third phase applies to our Autumn/Winter '23 intake, where we've been able to apply our new approach properly. The optimized intake for that season, which is effectively H1 fiscal year '24, reduces volume by option and restores option with removing the drag on sales and restoring the stock turn to pre-pandemic levels.

Alongside the short-term action we are taking to optimize our inventory, we're also focused on increasing our flexibility in the long term. ASOS has a unique proposition that combines our own brand product with corrected partnered brands. To fully capitalize on the proposition, we need to be able to respond more quickly to our customer demands.

Before I talk you through our Test & React pilot, let me first explain our own brand approach. ASOS is not aiming to be the cheapest product on the market nor the fastest on every item. The aim is to offer customers good value. That means fashionable products with good quality at competitive prices. Our customers appreciate that we are able to offer a product like embellished dresses, which are exceptional value for special occasions or their favorite denim that fits so well they were on repeat on and on again as well as product that applies to our unique twist to the latest trends.

Having the full breadth of ASOS product that perfectly blends with customer favorite brands, and this is one of the reasons that makes ASOS unique. The Test & React pilot will allow us to improve our offering further, to make our offer more relevant while we leverage our data capabilities and accelerate our speed to market where appropriate. The pilot, which is currently in progress, tests our ability to go from concept to site in approximately 2 weeks across a small number of product categories. This differs from our major competitors in the react part.

We don't just want to repeat successful styles at speed. We want to adapt our designs based on our customers' feedback, our customers' behavior, learn from the -- from what they are doing, so we are first to market with trends. Initial results have been very positive. And once the pilot has concluded, we will consider how we can roll it out what we have learned so far more widely.

To increase our flexibility on the partner brand side, then the partner brands model allows us to -- on our partner brands, the Partner Fulfills, sorry not partner brand, the Partner Fulfills model allows us to expand the range and depth of our product offering without the associated inventory risk.

More than that, this new business model will have an extraordinary impact on our longest lead time product areas such as sportswear, which typically operates on a much longer lead time than other categories, close to a year. Partner Fulfill has gone from 2 to 24 brands since launched in November '21, and is expanding rapidly for our key brands. For instance, for one of our key sportswear brands is already accounting to over 20% of sales through the ASOS platforms in the countries where this formula is live.

Our tech is continually developing to facilitate the addition of more brands and geographies and improving the partner experience. The second pillar of the driving change agenda focuses on operational excellence, improving our order economics and reducing our cost base. We remain committed to investing in the areas where the returns are greatest. We are relocating capital from nonstrategic areas and improving our operational excellence.

As I said earlier, I'm really proud of what the team has achieved to date. We are delivering on an ambitious plan with more than GBP 100 million of benefits already realized. And importantly, we will reap the benefits of the actions we have already taken during the second half. The initiatives already in place will drive more than 95% of the GBP 200 million of profit initiatives expected in the second half of the year. Part of this program of profit optimization and cost mitigation measures, we have made significant improvements to the profitability of our most important territories as well as removing substantial costs in the business.

The actions we have taken in the first half of the year can be split between 4 buckets. The first one is our buying optimization initiatives that include improving supplier packaging and labeling compliance to reduce reprocessing costs at our fulfillment centers, or taking action to improve product profitability, for example, reducing exposure to higher risk categories like bridalware. Second is our pricing and proposition changes that have resulted from the country review we mentioned at and which I will come back on the next slide.

Third is our supply chain initiatives that include things like reducing the use of the currently more manual Lichfield fulfillment center, eliminating split orders and rationalizing our U.K. returns footprint. And finally, the other category, we couldn't find a better name, which is a reduction in our property footprint and increase in discipline on marketing spend and consolidation of our tech contracts, for instance. Much like our approach on stock, we have taken an action in 3 phases to improve our customer profitability.

Firstly, at the brand level, we constantly refresh our brand portfolio to offer consumers the most exciting and curated edit of product. In October, we added to this with a comprehensive review of brand profitability. So we added a lens of profitability if you want. Brands can become unprofitable for a number of reasons, including heightened promo activity or high returns, which often coincides with limited product relevance. The action we took with each brand depending on whether this partner was deemed to be strategic or not. For strategic brands, remedial actions are taken to improve profitability.

We have included one example on the slide. This brand was loss-making in fiscal year '22. We took action to remove promotional activity, reduce discounts and cap discount depth. This resulted in sales of approximately 9 million units in H1 and a swing to strong profitability. Where the brands were deemed not to be strategic, then we have ceased to buy from them. This has been the case with the 35 unprofitable brands we highlighted at P1.

From November, we focused on underperforming territories as well, taking a differentiated approach to maximizing profitability in each market. Taking the example of Poland, which is one of our top 20 countries by sales and was loss making in fiscal year '22, we have removed free delivery while reducing our standard charge prices; reduce our investment in markdown and scale back marketing spend. These actions have driven a significant swing in profitability with an average basket value up double digits as a result.

Similarly, in the U.S., we told you in October that we were particularly disappointed with the return on investment in that market. We have since taken remedial actions as well, including removing unprofitable brands in the territory, a review of pricing and changes to the delivery proposition. This has resulted in significant improvement to profitability supported by a 6% increase in average basket value as well. In short, we have applied the medicine. And while the option to exit countries, which continue to be unprofitable remains as a last resort, evidence to date indicates that this may not be necessary.

Third, targeted level of action is at the customer level. We are very proud of the customer base we have built at ASOS. We have approximately 25 million highly engaged, young, fashion loving customers who shop with us regularly. By incentivizing more positive behavior from a small number of our customers could have a significant impact on our profitability. We currently have approximately GBP 100 million profit drag from a group of customers accounting for 6% of our customer base. It's a very small group of customers with a very big impact. These customers generate a loss of approximately GBP 6 per order due to a heavy reliance on discounted products and high returns rate.

For some of these customers, the behavior is temporary. And for others, it's part of a profitable lifetime journey. But for some, it's simply bad business for ASOS. We're now testing a more personalized approach to incentivize positive behaviors from specific customer groups.

Moving on to our third pillar, our robust and flexible balance sheet. We ended fiscal year '22 with ample liquidity of more than GBP 650 million of cash and undrawn facilities. However, we also made clear that we would revisit our financing within the next 12 months to provide the certainty and security to support our reimagine ASOS strategy.

Today, I am pleased to announce that we have amended and extended our existing GBP 350 million RCF to November '24. This secures our funding beyond fiscal year '24, supporting the business as it continues to execute on its driving change agenda and return to profitability and cash generation. Strategic investment and innovation remains critical for the long-term future of ASOS business, but we are now deploying capital in a more disciplined way. Having said CapEx guidance for fiscal year '23 at somewhere between GBP 175 million and GBP 200 million below our previously stated midterm range of GBP 200 million to GBP 250 million, we are committed to focusing our spend on projects which will drive improved profitability and enhance customer experience in a highly competitive market.

Our tech teams have achieved some really great things in the last few months, and I wanted to highlight some of their most recent projects to you today. They have built AI-based tools to optimize our pricing, markdown and stock management. They have developed recurring payments functionality, and they have created an infrastructure for us to launch ASOS Drops, a really exciting new capability enabling consumers to compete to access limited drops of our most in-demand partner brand product.

The final pillar of our driving change agenda relates to simplification of the ASOS decision-making processes, developing a culture of innovation across the business and reinforcing the senior leadership team with key strategic hires. Over the course of the last 9 months, we have established a new management committee, replacing many of the numerous boards that used to exist in the business before. This flatter leadership structure is designed to ensure that all critical elements of the business are represented when important decisions are made, encouraging cross-functional collaboration and enabling us to be more agile, reducing our time to market.

A strong top team is essential to refocusing the whole business on operational excellence. It was important to me to combine the fresh perspective of external hires with internal promotions to understand what makes ASOS so special. In terms of external hires, we have recently announced Dan Elton as our new Senior Customer Director; and Michelle Wilson as our Senior Director of Strategy and Corporate Development as well as appointing Sean Glithero, as our new interim CFO.

As you can see, the management committee is now fully functional, and I'm excited about the energy the team is already bringing to the organization. And I'm now handing over to Katy for her final ASOS results presentation and to take you through the financials in further detail.

[Katy Mecklenburgh, executive]

As Jose noted in his introduction, our financial performance in H1 has reflected our focus on sustainable profit and cash generation over the pursuit of topline growth at any cost, all set against the challenging backdrop for online retail. Amid cost of living concerns affecting consumer sentiment, our core 16- to 35-year-old demographic have reported feeling disproportionately hard hit. Meanwhile, online retail has suffered as shoppers have returned to physical stores post-pandemic.

Online penetration has fallen by circa 100 bps year-on-year, but we remain confident in the growth prospects for the channel in the longer term, with penetration still substantially higher than before the arrival of COVID. At the same time, we have taken wide-ranging actions to improve profitability. Driving Change initiatives include changes to pricing and delivery proposition across multiple geographies; reducing our investments in markdown and marketing; and exiting unprofitable brands as well as reducing intake to rightsize inventory.

We estimate that around half the decline seen in sales since our last update in early January is a consequence of these actions, but we remain convinced that they are in the best interest of the business in the longer term. Consistent with this, we've seen sales decline by 7% year-on-year, but gross margin remained resilient at 42.9% in the context of headwinds from input cost inflation. You'll remember that the previously guided 100 bps full year tailwind from freight will primarily impact the second half.

The phasing headwinds, 2/3 H1 weighted, and benefits of the Driving Change agenda, 2/3 H2 weighted, have resulted in an adjusted EBIT loss of GBP 69.4 million and an adjusted loss before tax of GBP 87.4 million. CapEx in the period came in at GBP 115 million, a step up from the same period last year due to the timing of the renegotiated contractual payments relating to the paused automation projects in Atlanta and Lichfield. We expect a step down in the second half to bring full year investments in line with our guidance of GBP 175 million to GBP 200 million.

Meanwhile, our cash outflow was of a similar magnitude to last year, driven by the much larger accounting loss, CapEx and the phasing of stock receipts and payments with the cash benefit associated with a lower H1 intake expected in H2 FY'23. The profit actions we've taken in the half are reflected in our KPIs with average basket value up 5%, supported by an increase in our average selling price. In the context of flat gross margin, this indicates an improvement in cash profit per order as the benefits of our profitability actions start to drive results.

However, similar to the trend in sales, we've also seen visits, order frequency, customers and conversion step back in line with our profit actions and a temporary reduction in the number of options on the platform to facilitate a reduction in intake volumes partway through the spring/summer buying cycle. We have seen some churn in our customer base following the increase we saw during the pandemic. Our new customer acquisition has also slowed as we scale back spend against a weaker consumer backdrop.

However, over the same period, we've taken a larger share of wallet from our customers than this time last year, giving us confidence that the actions we're taking are the right ones to transform ASOS into a sustainably profitable, more resilient business in the future. Here you'll see the slide we usually show you with some segmental detail. I won't talk about each region individually, but as is the case at group level, the variability in performance between segments reflects a combination of the economic backdrop and country-specific profitability actions as detailed by Jose.

Turning to adjusted gross margin. This has remained resilient in the face of inflationary pressures in the period. We said in our P1 trading update that we would hold gross margin flat into the half year, which is exactly what we've done with the expected tailwind from freight starting to come through to offset some adversity from trading activity, including input cost inflation, partially offset by benefits from pricing. We're particularly pleased by the gross margin run rate in recent months, which is up more than 300 bps year-on-year and gives the business the flexibility to prioritize further reduction in stock in the second half, even against the challenging trading environment.

Looking down the P&L to the EBIT level. We've seen circa 2/3 of the expected headwinds in our cost base comes through in H1, while the benefits of Driving Change agenda are primarily weighted to the second half. The majority of the freight benefit that we've guided to at our FY'22 results is also second half weighted. Jose has talked you through the main elements of the more than GBP 100 million of benefits realized in the first half of the year, but I wanted to give you a bit more color on the countervailing headwinds.

We've experienced inflation in the mid-single digits across our total cost base with run rates normalizing above pre-pandemic levels, the impact of which will persist until the increase annualizes in May. In addition, we annualized incremental costs added during FY'22. And in the early part of the year, we experienced inefficiencies in our supply chain due to overstocking. These inefficiencies resulted in increased distribution costs relating to split orders in the U.K. being shipped from Lichfield, which is not fully automated as well as an increased warehouse costs due to fulfillment centers operating above their optimal capacity.

As a result of these factors, labor cost per unit in the U.K. was up 16%. Converting some of these changes into our standard disclosure around operating costs. You can see from this slide that by far the 2 biggest movers in the first half were warehouse costs up 210 bps as a percentage of sales and other costs up 260 bps. Both of these cost lines included labor inflation in warehouses and head office, respectively. Our warehouse also saw the majority of the impact from return rate normalization and other includes the impact of incremental costs arising in the course of FY'22.

Finally, bridging from adjusted EBIT to our reported free cash flow for the period. You'll see that the largest drivers of the outflow are, firstly, the EBIT loss; secondly, CapEx, which we expected to step down in the second half of the year; and third, working capital outflow, which reflects a decrease in payables, largely offset by the lower stock value with the cash benefit associated with lower intake in the first half flowing through in H2. With that, I'll hand you over to Sean to talk you through our outlook and guidance.

[Sean Glithero, executive]

Thanks, Katy. And hello, everyone. It's great to see many of you in person for the first time. Whilst the first half of FY'23 has been challenging for many reasons, the actions ASOS has already taken have laid strong foundations for a return to profit and cash generation in the second half. While we're not expecting the trading environment to improve in the coming months and the actions we've taken to reduce unprofitable sales, we will continue to drag on top line growth. We're very confident that we're pursuing the right strategy to restore profitability and rightsize our stock position.

The headwinds we experienced in the first half will continue but abate somewhat. Inflation is expected to persist in the mid-single digits, albeit starting to ease and the impact of normalizing return rates were annualized in May. In parallel, the benefits of the various driving change initiatives will ramp up with more than 95% of the total H2 impact of around GBP 200 million flowing from initiatives already in place. We also see the full benefit of contractual freight reductions at a gross margin level.

As a result of these dynamics, we continue to expect a return to profitability and cash generation in the second half. And I'll now talk through some more detailed guidance for the remainder of the year. Since the end of the half, we've seen a continuation of the sales trends experienced in January and February, where approximately half of the sales decline linked to profitability measures we have taken. However, the improvement in adjusted gross margin run rate has also been maintained.

Looking ahead to the remaining 4 months of the year, we expect no change in the external trading environment and a continued impact from our planned profitability measures. As such, we expect a low double-digit decline in our topline for H2. In terms of the other guidance for the second half, we expect second half adjusted gross margin up around 200 bps year-on-year also allowing for more investment in markdown to achieve our planned inventory reduction of about 20% by the end of the year as the weak trading backdrop persists.

We anticipate second half adjusted EBIT in the range of GBP 40 million to GBP 60 million as we return to profitability, representing an adjusted EBIT margin of about 3%. Free cash flow before incremental refinancing costs were over GBP 150 million or over GBP 125 million after extra interest arrangement and adviser fees. CapEx in the second half of between GBP 60 million to GBP 85 million will be considerably lower than the first half and so that we are in line with our previous guidance of GBP 175 million to GBP 200 million for the full year.

And finally, for FY'23, free cash outflow, prior to those incremental refinancing costs, will be around GBP 100 million, and that's at the bottom end of the GBP 0 to GBP 100 million outflow guidance we provided at FY'22. I'm now going to pass over to Jose for a few closing remarks.

[Jose Antonio Calamonte, executive]

Thank you, Sean. I just want to give a short wrap up, no worries. So just to wrap up, we have covered a lot of ground in the slides, but also in the last 6 months. As you have seen, we have made we are making tough choices and taking decisive action to prioritize profitability and cash generation over growth at all costs and mentality. As I said before, I've talked you through some of the tough actions we have taken in the period.

This has undoubtedly had a negative impact on our revenue trajectory, but this action we're willing to take to lay stronger foundations for our next stage of growth. Our new commercial model is central to our purpose as a business in order to deliver its full potential, we have taken action to optimize our stock position, and that's the first step to the implementation of this model. This has required short-term sacrifices with regards to our option count in recent months, but by the autumn will be in a better place. And we have delivered on our plan of profit optimization initiatives in the first half, and we are confident on reaching the GBP 300 million of benefits for the full year.

These actions are substantially improving the core profitability of our business model. We have successfully amended and extended our financing, providing clarity on our future liquidity, and we have hired externally and promoted internally to form our new management committee. Against the challenging backdrop, ASOS has achieved a great deal in this period of reset. We are well positioned to return to profitability and cash generation in H2 fiscal year '23 and beyond.

While there remains much to be delivered in the next few months, I am confident that the ASOS will exit the year as a more resilient and a sustainably profitable business. Thank you so much for joining us today. And now I'm going to hand it over to you for some questions.

[Taryn Rosekilly, executive]

Great if you could state your name before you ask your question. You are limited to two questions each just in the interest of time, but maybe ask one question at a time, please. Over to you, Mike.

[Michael Benedict, analyst]

First on keeping the offer fresh. So some of your peers have focused more on growing their own separate off-price sites. I wondered if that's something ASOS would consider.

[Jose Antonio Calamonte, executive]

So you said they have focused on...

[Michael Benedict, analyst]

Growing their own off-price sites. Is that something ASOS would consider?

[Jose Antonio Calamonte, executive]

Well I think that when we're talking about keeping our offer relevant, there is a lot about -- sorry, the famous fresh fish. So bringing stuff that is relevant for consumer means that is relevant in the moment. There is an element of pricing that and there is no question that -- and that's why we say we want to be competitive when we're talking about prices. But what we also see is that when we offer the right styles, consumer act accordingly and they buy into that. So we see off-price as a way to clean old stock, but not as a core part of our value proposition where we're talking about relevant and new. And so clearly, it's part of our business model to clean old stock, but not the core.

[Michael Benedict, analyst]

And my second one is just on the Driving Change measures. So it sounds like they're largely implemented for FY'23. I wonder if you could give us some color on the further actions that could support FY'24 and beyond.

[Jose Antonio Calamonte, executive]

As I said before, we have put in place a set of very comprehensive actions in realities more than 140 actions that are supporting this GBP 300 million of profitability cost improvement during the course of the year, and we are quite confident that they will come to have an impact on H2. Will this come with a -- will this impact be sustainable over time? The answer is yes. Obviously, we are not doing one-offs. The ambition is to -- and the intention is to have a set of actions that remain on time and improve the profitability of the company. So certainly, yes, if I may and maybe deviating a little bit from the question, but I think it's relevant.

Obviously, these actions have had an impact on sales as we have been very clear and it might still have an impact during the first months of the next fiscal year. But the ambition is to have a very decisive action to give ASOS the right profitability level, that will create a solid base for the future growth of the company. And in that sense, we have not hesitated to take tough actions, as I said, there are no secret [ cows ] and so on.

[Sean Glithero, executive]

I think to your question about next year, this year has been the first phase. And actually, a lot of the tools and the data and the insight that we've seen, we can build on that. So going forward, it's about moving those less profitable customers to be profitable and refining what we're doing. So trying to improve retention, trying to get repeat rates up. That's the next phase.

[Taryn Rosekilly, executive]

Caroline Gulliver from Stifel.

[Caroline Gulliver, analyst]

It's Caroline Gulliver from Stifel. Actually, just my first question is on that churn that you've been seeing, you mentioned that 6% attribute sort of GBP 100 million of a loss. I just wondered, is there any overlap with the 7% reduction in Premier customers that you've already seen? And sort of how do those two play together?

[Jose Antonio Calamonte, executive]

Well, first of all, I think it's not uncommon to see that, not 100% of the customers are profitable in many businesses. Being said that, what we have done is to take action to promote the -- if you want the best possible behaviors and that we have increased prices in Premier, for instance, so we have implemented thresholds to try to reduce that. Some of these customers are Premier customers. That is true, but not 100% of them. But -- sorry to go back to the same idea, we are taking decisive action to make sure that we have the right level of profitability. That has come with an impact in the number of customers, yes, that some of them are premier, yes, that doesn't really mean we don't love our premier customers. We really love them to pieces, but we need to make sure that we have a sustainable business model.

[Caroline Gulliver, analyst]

And just as an addendum to that, you saw a 9% drop in active customers in the U.S. Are you expecting a further reduction in active customers with the measures that you've put in place?

[Jose Antonio Calamonte, executive]

Well, the vast majority of the measures are already in place. So we would see that probably -- this is going to ease during the course of the next months, but there might still be some loss of customers. Among other things, we have implemented a more disciplined approach into marketing in the U.S. So obviously, that is having an impact, but we are seeing that the impact in profitability as well is quite remarkable.

[Taryn Rosekilly, executive]

Adam Cochrane.

[Adam Cochrane, analyst]

Adam Cochrane, Deutsche Bank. The first question, you talked there about the actions that you've taken. Can you just describe when the annualization -- so as you've gone through the first half, when have these actions been taken to improve your profitability. So should we expect that they will fully annualize in the second half? Or will some of them be in the first half of next year as well in terms of the sales impact that you sort of said maybe sort of 6% or 7% coming from...

[Jose Antonio Calamonte, executive]

You want to take that?

[Sean Glithero, executive]

Yes. So the program has grown over time, and hence, why you're seeing sort of that sort of 1/3, 2/3 split in this financial year. We started to implement back end of the calendar year and actually then got into full speed at the start of this calendar year. So that's around the time that they're going to start to annualize.

[Adam Cochrane, analyst]

So for P1 next year, there will still be a drag on the active customers or visits or something because of those actions?

[Sean Glithero, executive]

[indiscernible] and P1.

[Jose Antonio Calamonte, executive]

Yes, but hopefully also an impact on profitability.

[Adam Cochrane, analyst]

Yes. And then the second question, you talked about 6% of customers not being profitable. Is that correct?

[Jose Antonio Calamonte, executive]

Yes.

[Adam Cochrane, analyst]

Are those 6% of customers left at the end of the period or still to be exited? And what was that number like at the beginning of the period?

[Jose Antonio Calamonte, executive]

What was the number at the beginning of the period -- at the beginning of this fiscal year.

[Adam Cochrane, analyst]

And what is that now?

[Jose Antonio Calamonte, executive]

I don't know, to be honest, I couldn't answer that one. Obviously, I'm sure it's significantly smaller because we have taken a lot of actions to tackle that behavior, but I don't know if it's 6%.

[Adam Cochrane, analyst]

Okay. And will you have to -- what are you reliant on to achieve sales growth again? Because historically, it may have been pricing, promotion, improved deliveries. Is it now just going to be about annualizing all your changes, waiting for the consumer to recover and then hopefully, the better product that you're putting in front of them.

[Jose Antonio Calamonte, executive]

Right now, we're really focused on our Drive Change agenda. And this is an agenda that is really focused on having the actions to take the company back to profit. We are less focused on this growth agenda that you have. There will be time to talk about that, but right now -- if you want probably one of the reasons why we have been able to execute 140 options plus in this period of time is that the company has been really focused. I think focus has been critical. And I want to make sure that, that focus continues for the remainder of the fiscal year.

So there will be time to talk about growth once we are over this fiscal year. If you want, in general terms, obviously, the improvement of the quality of our assortment and improvement of the quality of the engagement with consumers will bring additional growth. And if I may, we already see some impact of that. If you look into our core consumers in the U.K. that are 16 to 35 years old, we are gaining share with them, which means that they are recognizing the value of what we are doing, and they are recognizing the value of having a more engaging assortment.

[Taryn Rosekilly, executive]

Just to come back on your 6% of active customer questions before we move on to Anne that was a group of active customers that we identified as particularly unprofitable at the year-end. So the 6% is based on FY'22. The reason they're particularly unprofitable is they're typically shopping on promotion. They're returning a lot and it's very high frequency. So it's not that we're giving a proportion of our customers that are unprofitable, we're just calling out this particular group where we're looking to take action. The action started from around March and there's a lot of kind of testing to do to see what we can do to drive those customers back into profitability, but we're not going to kind of keep giving an update on where that 6% moves to.

[Anne Critchlow, analyst]

It's Anne Critchlow from SG. First question about the U.S. How have you changed the delivery proposition there exactly? And then secondly, just to check on the returns rate. Is it still running 150 to 200 basis points higher than pre-pandemic? It sounds as if it is, but just a check.

[Jose Antonio Calamonte, executive]

So on the U.S., the question is what have we changed in the delivery proposition? Precisely. To be honest, I don't have all the details, but certainly, we have changed things on our next-day delivery and standard proposition. We have some of the -- when consumers have to pay for delivery, we have increased some of the rates. I think from the top of my head...

[Sean Glithero, executive]

Yes, we've shortened the return period as well.

[Jose Antonio Calamonte, executive]

We have shortened the return period to accelerate returns. So -- then the second one was sorry, refresh me...

[Sean Glithero, executive]

Returns rate.

[Jose Antonio Calamonte, executive]

Return rate. So we saw -- let me take a little bit of perspective here. We analyze returns rate quite in detail. And obviously, returns rate is impacted by a lot of things. Geographic composition, different geographies have different returns rate, and we know that certain countries have significantly higher return rates. So when these countries are performing better, our average return rate go up. Certain product classes have higher returns rate, for instance, dresses. So when dresses performed better, return rate go up. And also the tenure of our consumers, the longer they are with us, the more they return. But what we saw, if you want, starting March to May last year was most likely as a consequence of the cost of living crisis is that if you want the underlying behavior, our consumer was changing, and they were returning more. That seems to be here to stay. So this behavior is continuing at this level.

[Tony Shiret, analyst]

Tony Shiret from Panmure. A couple of questions. First of all, obviously, there's a lot of negative stuff going on that you're firefighting pretty vigorously. I just wondered in the sort of way in which you've looked at the business and try to sort of identify areas of underperformance, whether you think there are some longer-term things that are going to come out of this that maybe you don't want to be in a particular region or you don't want to sell something or the other or you need to make a fundamental change as to where you operate in a region to make it worth doing. So the question is, is there any sort of longer-term analysis dropping out this current exercise? And the second question, which is a bit simple, I guess, is can you give us some idea of how the stock will look post all of the changes you've made in terms of SKU count, age of stock, that sort of thing, some KPIs.

[Jose Antonio Calamonte, executive]

So on the long-term analysis, on the -- I'm assuming you're asking about long-term analysis from a geographical point of view. It could be, okay. So we were quite disappointed with the performance last year, and that's why we put in place the kind of measures we have put in place. And let me recap even though I mentioned that during the presentation, we started tackling our brands and we had a very decisive action with some brands. Then we move to geographies, and we are now seeing the outcome of these 2 actions. And we see -- we are very happy to see that there has been a significantly change -- significant change in the profitability of most geographies.

We still have a third wave of changes to come. That is what we were mentioning about consumers, and this is going to be coming. It only started in March, and it's going to be coming during the course of the next weeks and months, and we are expecting an even deeper change in the profitability. So right now, we don't really see any urgency from a geographical point of view in making any drastic decision. Being said that, we are open to make decisions if things change and we want to make the right decisions when it comes from a strategic point of view, also from a geographical footprint or whatever.

But -- and I guess, answering to your question as well. When we make a decision, the decision is not necessarily binary 1 or 0, be in a geography or not be in a geography, there are a set of models that we can implement in some geographies to still remain there without a negative impact. So that -- this analysis is a continuous analysis. We are always looking at what we're doing. But if you want to summarize it, we don't see any urgency right now to take any drastic decision.

[Sean Glithero, executive]

The stock question. I mean, as we want to reduce stock cover, it's naturally going to improve the aging of the stock. And as we want to have less committed buy and actually grow into our buy through a season, and that will help it be more relevant freshers. So we will see better aging from those activities. And from a SKU count, I think you would see, as we talked about earlier, that we want to have more width and that's part of the activity we saw in the first half that we didn't have the width necessary that we wanted. So we have all width in the future, and that would be both our stock. And then as we do more with Partner Fulfills other brand stock as well to increase the assortment for the consumer.

[Jose Antonio Calamonte, executive]

If I may, this is a very relevant point. This is like -- because Partner Fulfills is going to -- is already enabling us to manage the stock in a more efficient way and it's enabling us to add local heroes from smaller countries that we would not be able to do it with our normal economic model that now we can. So obviously, that is going to have an impact on our stock width.

[Tony Shiret, analyst]

So what is your SKU count at the moment?

[Jose Antonio Calamonte, executive]

Normally it's 250,000 options. This is what we normally have. Now it's a little bit less because of the actions we have taken.

[Tony Shiret, analyst]

And how much of the 250 is Partner Fulfills?

[Jose Antonio Calamonte, executive]

Right now, Partner Fulfills is still more -- is still small. I wouldn't be able to tell you, but right now it's still small.

[Sean Glithero, executive]

Partner fulfills, we're targeting that part of the business to be 5% sort of our GMV. So it's small at the moment.

[Miriam Adisa, analyst]

It's Miriam Adisa from Morgan Stanley. Firstly, just on the gross margin. If you could just walk us through the sort of 200 bps improvement you expect in the second half. Is that still being mainly driven by freight? Or are there other drivers there? And then also, are there any risks in terms of the promotional environment in terms of being able to achieve that 200 bps expansion? And then just coming back to growth again. I mean I understand that you're saying that in the U.K., you're gaining market share, but how are you still balancing your view of long-term competitiveness of your customer proposition, particularly outside of the U.K. and your willingness to maintain your market share there?

[Sean Glithero, executive]

Okay. I'll do the margin and you do market share. So I think the second half margin is a function of easing inflation. It's a function of the freight and duty initiatives that we've put in place and the contractual rates that we've signed up to flowing through. So we're feeling positive about that increase in gross margin in terms of both of those factors. It also gives us -- we've obviously accounted for a level of planned promotion in that margin, but it's a good gross margin. It's a good step up, and it gives us flexibility if we want to do more, if the market continues to be particularly tough it gives us room to push harder if we need to. Market share?

[Jose Antonio Calamonte, executive]

The market share. Sorry, when we're talking about market share, let me go back to the idea I said before. Right now, we are focused on making sure we have the right level of profitability. And we are sacrificing sales, and we are aware of that. So market share is important if it's in our core geographies and in our core customer segments. Otherwise, it's less important because having market share that is unprofitable is not something we are chasing right now. So in that sense, we will chase market share if this is sustainably profitable or sustainable or whatever would be the right word. That's where we are right now.

[Taryn Rosekilly, executive]

Just to remind, ask one at a time, please, Andy.

[Andrew Wade, analyst]

Andy Wade from Jefferies. Can I ask about the written-off stock? Just mechanically, how has that worked? Where is it gone? Where is it sitting now? Has it been sold? Is it being given to third party? What revenue has been recognized in relation to it? Can we just run through that...

[Jose Antonio Calamonte, executive]

Yes. Sure. So 90% of it has already been extracted from our warehouses. So there is still 10% to be extracted, but the vast majority has already been extracted out of the system. I don't know if you recall it, but what we said is that the vast majority of this stock is going to be sold through third parties, not through our own. That's why we have extracted it. We have sold a part of it, but it's not a big one. We are closing negotiations to sell the rest, and we are optimistic. We are positive that we will do it. It is not an easy environment because there are a lot of excessive stock in the market, but we're advanced there. And in terms of the recognition of the sales, this is GBP 2 million, I'm getting hint. So far, it's very small. We always know and we always [ will put ] into account and that would be a small contribution per unit in terms of cash. Obviously, it's all loss-making.

[Andrew Wade, analyst]

So GBP 2 million recognized so far, then there's more to be recognized in the second half. Is that right?

[Jose Antonio Calamonte, executive]

Yes, that's right.

[Andrew Wade, analyst]

Sort of similar quantum, GBP 10 million, I mean what sort of...

[Jose Antonio Calamonte, executive]

It should be more than GBP 2 million. Somewhere between GBP 15-ish million.

[Andrew Wade, analyst]

And has that stock been fully written-off?

[Sean Glithero, executive]

Yes, it's been written down to decimated sales...

[Andrew Wade, analyst]

Right. So it will net to 0 contribution in the second half. It will provide a revenue number, but no profit.

[Jose Antonio Calamonte, executive]

No losses.

[Sean Glithero, executive]

And there will be some extraction costs in it as well to finish off the last 10%.

[Andrew Wade, analyst]

Fine. Okay. All right. And then going back to the question on gross margin. Just to be clear on that, so you're guiding to 100 basis points benefit from freight for the full year. You've seen a little bit in the first half. So presumably, most of that 200 basis points in the second half is coming from that freight being up 100 basis points for the year, right? So at least 150 of it?

[Sean Glithero, executive]

Yes. So 100 bps is the year-on-year benefit as you said. 200 bps for the second half...

[Andrew Wade, analyst]

And most is coming in the second half...

[Sean Glithero, executive]

And most it's freight and most of that's locked in contracts.

[Andrew Wade, analyst]

So where I am going is if almost all of your 200 basis points uplift in the second half is coming from freight, I would have expected you to be getting -- if you're doing all the -- putting all these measures into improved basket economics I have been -- and you're seeing a 5% or 10% impact on your revenue from implanting them wouldn't you've been hoping for underlying gross margin to be ahead to leave you in a better place?

[Jose Antonio Calamonte, executive]

Yes. I mean, that's a good question. The thing here is like we're also seeing a challenging environment, and we are -- there is always a triangulation between margin, stock and cash. So we are using part of it to make sure that this triangulation works well. Because the ambition is also to make sure that we don't pile up on old stock at the end of the year. So there is -- the fact that we put in place -- all the measures we put in place is giving us the flexibility to do that. Otherwise, we would not be able to do it without a deterioration of our margins.

[Sean Glithero, executive]

And the basket economics come through in lower units, which then goes for your distribution and your warehousing cost.

[Nicolas Katsapas, analyst]

It's Nicolas Katsapas from BNP Paribas Exane. I just have a couple on the stock profile gross margin impact on that. So it sounds like you definitely moving towards buying more in season product. Can you be clear as to whether you're speaking about your own brand? Or is it third-party brands included in that as well? And can you put a figure to that target sort of proportion of the stock that you want to get to buying in season? And then what would be the puts and takes on the gross margin from that movement into more in-season buy? Because presumably, it's a bit more expensive to contract, but you'd see better gross margins from fresher products? Just some thoughts around that.

[Jose Antonio Calamonte, executive]

So -- as I tried to explain before, obviously, there is a different approach to our own brands and to our partner brands. When we're talking about our own brands is where we can apply this in-season purchase. So this short cycle or ultra low short cycle or whatever you want to call it, we try to benefit from what we learned from the behavior of the consumers. And as we said, it's more about making our assortment relevant, not necessarily repeat what they buy. So in that sense, what is our target? We have started with a small base, but just to give you an idea, already more or less 30% of what we buy, it's happening in closer sources. So it's already having this impact of being bought in closer sources.

So not necessarily whatever we transition to this model is going to have a very negative impact on intake margins because we are already buying in short, I mean, in the U.K. or Europe or Turkey. So not necessarily a lot is going to have an impact on it. we would have to go beyond 30% to have an impact, and we are not even close to that right now. So it's not going to have -- if you want have sizable impact in the coming year or years.

[Taryn Rosekilly, executive]

Simon, and then George and then time for one more from online.

[Simon Bowler, analyst]

Simon Bowler from Numis. Can you talk a little bit -- first of all, can we talk a little bit around kind of warehouse automation and capital commitments and what we spent in the first half. What's -- what are your plans there? Is it completely automation of those 2 projects? How much further can that be delayed if that is indeed the plan to complete them through?

[Jose Antonio Calamonte, executive]

As we said, we were posting these 2 projects. And actually, one of the reasons why the CapEx in this year is more tilted towards H1, it's because of some contractual agreements with the providers. So in that sense, that clearly explains that. We will be continuing with these projects during the course of the calendar year '24 and '25, and we will be aligning that with the evolution of our sales. So in that sense, no -- we will need to see as we see the evolution of the market. That was your question, right?

[Simon Bowler, analyst]

Yes. Okay. And then secondly, aligning your kind of revenue gross margin guidance, it looks like you need to cross all the operating cost balances of GBP 100 million, give or take, reduction half-on-half or year-on-year, it's similar math. I understand some of that's going to be volume related given top line. But can you just talk a little bit more around which specific kind of cost categories are there opportunities coming out of, is the big step changes in terms of the warehouse handing line or where those other aspects really focus?

[Sean Glithero, executive]

So you're right in terms of the volume benefits come through in the distribution and warehouse. We also get benefit in the warehouse from the reduced stock naturally from running lower stock and not having to move it around as much, not doing the split orders that will come through, and that's part of our profit optimization that comes through in that line. Also part of our cost measures that we put in place to come through more in the second half. That's going to be spread across quite a lot of the different lines across payroll, across tech costs, across other overheads, et cetera, and marketing. So there isn't big chunks, but it's a sort of a right sizing an operational -- excellent approach on most lines, but the volume impact is probably the biggest.

[Simon Bowler, analyst]

Okay. And is that second half cost base, therefore, as to if one to start thinking about as we think about outer years and, I guess for '24 exclusively?

[Sean Glithero, executive]

I think it is. But whilst factoring in volume as well and inflation, I mean, inflation, whilst it's eased, there is -- it still persist. So we've -- it's not going to be a flat cost base, it's going to rise because of inflation.

[Georgina Johanan, analyst]

It's Georgina Johanan from JPMorgan. I've got 2 as well, please. First one, just a high level one, I appreciate that you're sort of focusing on the cost side of things and profit optimization at the moment, but just taking a step back and thinking much longer term, I think you mentioned in the release that you're sort of confident in that growth in online penetration more long term. And I was just wondering if you could talk through how you see some of the drivers of that. Or actually, do you think we're reaching a place where potentially online is maturing in some of the developed markets in Europe?

And my second one was just around the other cost line. A huge increase in that line year-on-year, I think, about GBP 30 million. I mean I appreciate that there's energy inflation. I appreciate there's probably mid-single-digit inflation in some of the head office wages and so on and so forth, but it just seems a huge increase. Was there anything sort of one-off in nature in there or kind of anything to call out to just help us understand the move better, please?

[Jose Antonio Calamonte, executive]

Let me take the first one. So when you're talking about the evolution of the market, it's interesting to see how -- the digital market, it's interesting to see where we are right now. What we're seeing is that the markets are going back to their natural rate of growth. So after the acceleration during the pandemic, now they are going back to a natural rate of growth, and that is pretty much happening almost everywhere with very few exceptions. The only place where I've seen that this abnormal growth is remaining there is in Latin America, but in the rest of the world seems to be going back to their natural growth, but it's going back to their natural growth.

We are now in the moment that where we're seeing this deceleration because of this return to their natural curve. But we are not seeing that, that penetration is going to be reduced or that consumers are going back to the stores, to the physical stores or anything like that. Just to remind you in the world of apparel, obviously, it's different by different markets. The most developed markets have a 30% penetration of online sales, which is still very small. So when we talk to consumers and we do a lot of that in our core target, that is not -- you don't really see a return to stores or anything like that. I think penetration is going to continue.

This is -- the digital shopping experience bring something that the physical experience cannot bring and it's getting better and better every day. So clearly, there is not going to be a stop in that if you want transition towards digitalization. It's like physical cannot offer all the sizes as digital can. Physical cannot offer all the options shown in an outfit as digital can. So clearly, this is not going to stop there. What we're seeing right now, in my opinion, is much more a return to the normal growth. You want to take that?

[Sean Glithero, executive]

The other costs, we do have it in the release, although not in huge detail. You're right. There was a certain amount of inflation that we've seen. But there's also quite a strong element of annualization. It's just -- it was the annualized cost entering the year compared to the average, that created its own headwind. And we've been unwinding some of that through our cost optimization measures. So there was -- we called out one-offs quite transparently. This was inflation and annualization of costs coming into the year.

[Taryn Rosekilly, executive]

And time for one final question from online. So Jonathan Stevenson from Peel Hunt. What do medium-term sustainable EBIT margins will look like for ASOS?

[Jose Antonio Calamonte, executive]

That's a good one. Today was not -- it's not time for guidance. I think if I may, let me use this one a little bit also to wrap up. When we established this Driving Change agenda, the aim is to make sure that we take ASOS back to a profitable profile. And we said we would take tough decisions, we have. We are seeing now the impact of those tough decisions, the positive and the negative. So in that sense, I think when we look at H2, it's going to start to look more how the company is going to look like in the future.

Whether -- we are going to give our guidance? Certainly not. That's not the purpose of today. As I said, focus is super important. We want the organization to be totally focused on the execution of the second half and this is where the value is going to be. But again, I think looking at the performance we have on the second half, I think it's giving a good indication of what is a good base for ASOS looking into the future, but still early to come with the guidance.

[Taryn Rosekilly, executive]

Great. Thank you. Thanks, everyone.

[Jose Antonio Calamonte, executive]

Thank you, everyone.

[Sean Glithero, executive]

Thank you.