ASOS PLC

LSE:ASC

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Jose Antonio Calamonte, executive]

Okay. Good morning, everyone. Can you hear me? I hope so, yes. Okay. Thank you for coming this morning. As always, and happy to have you here. And as always, I'm sick, no, just kidding. I have a little bit of cough, but nothing, I thought it would be nice to start with a little bit of a joke.

So thank you for coming. As you know, this morning, we will be sharing with you our results for H1 and our level of progress in our transformation of ASOS and also our outlook and our guidance for the rest of the year. I promise this is going to be a much shorter session, so we will not be torturing you in these uncomfortable chairs for as long as we did at year-end. So I think we'll have plenty of time for Q&A at the end.

So let me get it going with the main messages. So the first thing, let me just start by saying that, for us, it was clear that fiscal year '24 is a year of change. It's a year of transformation. The transformation of ASOS into a more agile, flexible, cash-generative and profitable business. And in this journey, there was a very clear starting point, precondition, whatever you want to call it, that is it was reshaping, resizing our stock profile.

And there was a precondition because that was unlocked into things on one hand, it was unlocking a lot of cash. And on the other hand, it was on the precondition when it was going to create the setup to really generate all the potential of our new commercial model.

And today, I'm happy to share with you that we are having good progress in this transformation. First of all, I'm happy to say that during the first half of this fiscal year, we have produced the best result in terms of cash generation since the first half of fiscal year [ 2017 ]. That is GBP 240 million better than last year. And that performance has been supported pretty much by 2 pillars.

The first one is the stock resizing. We have done a lot of the heavy lifting of the stock resizing. We have already gone below the GBP 600 million that we were defining as our target for the end of the year.

And that has been achieved by a combination of targeted discounts on the older merchandise and a very active management of the in-season merchandise through a management of the intake, but also through the management of the sell-through, and I will give you more color later on, and it has also been achieved by a disciplined approach into cost. That will also give you more color later.

What we want to highlight is the stock resizing we have done the heavy lifting and that has resulted in a very interesting, very remarkable. I don't know the right word, level of cash generation in this H1.

The second message I wanted to share with you as a highlight is that we see good progress in the strategic transformation of ASOS, this is the big transformation to become a more agile and more flexible business that really attracts consumers because of fashionability. I will share more detail later, but just to highlight 2 of our star initiatives, Test & React and Partner Fulfils on Test & React during the course of the half, we have already reached 5% of the sales of our own brands.

And it's not only the size that is leading us in a good and comfortable position to reach our targets for the year, it's also how we have reached that position. We have done that by generating a gross margin of 58% with our Test & React lines, which pretty much means that we are selling the vast majority of it at full price with hardly any discounts that is precisely how do we want to interact with our consumers.

The second one that it would be Partner Fulfils. We have already reached 5% of our sales of third-party brands through this more flexible fulfillment model. That is pretty much the target that we had for the year and that doubles the contribution of last year. So it's also very reinforcing to see that these 2 initiatives, as an example, are going at that pace.

If you want on the other side of the medal, it is that as a result of our deliberate actions to tackle the unprofitable sales and also as a result of the reduction in the intake, we have seen a reduction of sales of 18% as we announced in our trading statement in March, and we are restating today.

All of it together give us great confidence to reiterate our guidance for the rest of the year. And as I said, our guidance of this year pretty much encompasses the capacity to unlock all the value of our proposal going into fiscal year '25 and beyond.

And the last message I wanted to highlight here is that I'm very happy to announce the joining of our new CFO, Dave Murray, who will be joining at the end of this month, the company and always very, very exciting to see him coming. I will also can elaborate a little bit more on that later if you guys want.

And I would like to take a second to say thank you to Sean, who has been an integral partner. I've been told that I have not to say partner in crime because English is bad, but an incredible partner for these 14 months and he has given us the position to take all the time we needed and wanted to do the right choice with our CFO. So thank you so much, Sean. I really appreciate it, and you will always be an ASOS. That's very clear.

So with that, let me -- if you want to take one second to take you back to the strategy presentation we made 6 months ago more or less. In that day, we were saying that our ambition is to be the world's #1 fashion destination for fashion loving 20-something. And that ambition was supported by 5 pillars. Offering our consumers the best product, best meaning the most relevant products, both with our own brands and our brand partners, and that was achieved through a set of measures, and speed was the word that I used a lot.

The second one was to become a destination of styling is the way how we blend our own brands and these third-party brands makes us unique, and we want to leverage more on that capacity and that uniqueness of ASOS. The third one was to offer our consumers a more compelling and distinct brand and that was going to be supported by a change in our marketing model but also investments in our consumers interact with us in our site, so their shopping experience.

The fourth one was to offer them a frictionless and seamless experience, but we wanted to be competitive, and here, we were saying that we want to match the best proposition in the market but not necessarily to go beyond. And all this was underpinned by our obsession, we've been more -- with operational efficiency, we've been more efficient with releasing continuously -- with better capital allocation to continuously release resources and reinvest these resources into our business.

These priorities, we -- what we did is we distill these priorities into 3 very specific if you want action plans or priorities, sorry to repeat the word, for fiscal year '24. And these were the 3 that you can see right now on screen, which was to offer our consumers the most relevant products, and this was supported by making sure they can see these products. So a very disciplined approach into stock management and also this obsession with speed to develop a stronger set of consumer relationships, and as I said before, supported by change in our marketing model by also investments in a fashion-led customer experience and with a reduction in our cost to serve as a result of this obsession with capital allocation and operational excellence.

Let me spend the next minutes sharing with you a little bit the level of progress we have reached in each and every one of these priorities. Starting with the most relevant product. We sell clothing is the most important thing we do. It's the reason why we're here, it's the reason why our consumers come here, and that has to be always in the center of everything we do. Offering them the right product, offering them the right curation and the right styling to make ASOS the unique place it is.

In order to, let's say, sharpen this capacity of ASOS, we have identified 3 clear initiatives for this year. The first one is this discipline in stock management so that consumers can really see the new and the new is not under a mountain of old stock. The second one is we want to be the best partner for our brands so that we can really offer our consumers the best curation of the best products.

And the third one was this obsession with the speed as a way to elevate our own brands. And I'm going to try to elaborate in each and every one of them, what we have done. In terms of this disciplined stock management, you will probably recall this graph because this is a graph we have used before, and it's been a little bit updated with the real data. We started fiscal year '23 with pretty much GBP 1.1 billion in stock, we ended the half with less than GBP 600 million. This is a 45% reduction in absolute terms.

And this is when I say that we have done the heavy lifting. That's what I mean with that. There's been a lot of work to do that. That is not a coincidence. And pretty much if you want, there are 3 main levers behind that. One is how we have tackled our older stock and the other 2 are in how we have managed our in-season stock. So let me -- if you want go a little bit deeper on it.

How we have tackled our older stock. Obviously, we had a lot of old stock, as we said back in the days. And what we have done is we have been very determined with a targeted but aggressive level of discounts to get rid of that stock. We have invested 60% of our discounts on that type of stock and 50% of our stock reduction comes from the stock that is older than 12 months. So we're very happy with that.

Obviously, that has had an impact on our margins. And this impact is 25 in 5 points. So the average margin over the half has been reduced by 5 points because of all the efforts we have been doing here. That is, if you want the bad news. The good news, it has enabled us to unlock GBP 175 million of cash, which is a sizable amount of money, and we are happy to say that we have been able to it.

We have done a lot of the heavy lifting, as I said, with the autumn/winter stock. We need to use the second half to finalize that job with the spring/summer which is in a better place, but we still have work to do. And as our stock shape gets more normal, obviously, the impact on our margin will become lower. And we will see that during the course of the second half.

The second part of our effort has been focused on the in-season stock. In the case that we're talking about, it would be now the autumn/winter '23. That is the last season we finished pretty much in January, February this year. And in this in-season stock, we have pretty much done 2 different things. On one side, we have been very cautious with the intake. We have reduced our intake by 30%, that obviously has had an impact on our capacity to sell, but our -- as I said before, it was almost a precondition to unlock the value of our new commercial model that we would put the stock in the right place.

And the second one is that we have been very disciplined in how do we manage the in-season stock, making sure that is moving at the pace we want at every state. That has taken us to move our stock 40% faster. So the stock turn has increased significantly. The end point of the season has reached 17 percentage points higher than last year, up to 83% sell-through and is enabling us to say that today, the amount of merchandise that we are carrying over from autumn/winter this year versus last year is 2/3 smaller than last year.

So if you want, in simpler terms, the problem of all stock is not going to repeat because we are dealing with it in-season instead of waiting to do it later.

So let me make a mention of the Red Sea events. Obviously, that 30% reduction was the planned reduction of the intake what we have seen starting pretty much in December, but especially over the -- over the last almost 4 months is that the Red Sea events have had an unplanned impact on our intake. That unplanned impact started having more of an impact on our own brands, which are the brands obviously that we have more control on the value chain. We are very actively managing that, and I'm pretty confident to say now that we will have probably neutralize that impact during the course of the next 4 to 8 weeks.

What we're seeing now is that part of this impact is moving to our third-party brands or brand partners. And obviously, we will be managing that within the partner relationship that we have with them to make sure that everybody is in the best possible position, but so are we.

So we will continue with that journey of clearing -- sorry, bringing more intake and clearing the old stock. And obviously, that is going to have an impact on the shape of our stock. And as the shape gets more normal, we will see some of the investments to unpack and that will be obviously great news, but we'll also see more intent that will help us to sell better.

The second thing that I mentioned was we want to become the best partner for our brand partners -- sorry to repeat the word. We want them to see ASOS as a different place. We are a different place. We are the place where we can, in the mass market, be in a multi-label if you want context and a fashion context. And that is something highly appreciated by them. And what we have done in the last 6 months to grow our relationship we've done -- one of the things we have done is to make it more flexible through Partner Fulfils. This is a program that you know very well, no need to spend a lot of time on it.

I'm happy to say we have already reached 5% of our sales of brand partners through this program, which is very reinforcing. And it's, as I said before, doubling the contribution of last year and already at the target that we have for the full year. And this has done by the addition of 21 brands during the course of the half.

The last ones to come to the party that are mentioned in the slide are Converse and Ann Summers, and they are joining a very long list of brands like Adidas, New Balance, Tommy Hilfiger or Bestseller to give you some examples. So it is a very consistent. As of today, we have 54 brands that are in this program. We are enriching that relationship with our partners with ASOS fulfillment services, and we are currently in a pilot with a smaller Spanish brand called Scalpers that has very generously decided to be our guinea pig here. And we are obviously using that pilot to develop the technology, but also to [ learn ] all the implications, and we are very comfortable to say that during fiscal year '25, we will be able to roll it out to bigger brands and then have a much bigger contribution into this kind of flexibility and reach a more flexible formula.

And last but not least, I wanted to mention that, obviously, on top of that, we are always working in bringing new brands and enriching the assortment for our consumers, and I'm very happy to share with you that during the second half of the year, ARKET and Vega are going to be joining the set of brands that we offer our consumers. This is only just an example. We keep on adding new brands continuously, and we will continue doing that because as I said, our ambition is to offer our consumers the best curation of the best brands.

Let me go to -- as you probably already know, one of my personal favorites, that is how do we elevate our own brands. Our own brand is -- our crown jewel is what makes us absolutely unique. Nobody has own brands. That's quite obvious. And this is our obsession with the speed, and I'm going to talk now more about Test & React and though we have other programs, and we mentioned those programs in the announcement this morning.

As you know, Test & React is a market-leading program. We are bringing merchandise in less than 3 weeks, actually 2.3, if I recall properly, but don't quote me on this one, from design to shelf, I could say, which is quite remarkable. We started the program with suppliers in the U.K. We have already enlarged, we have already opened that program to suppliers in Turkey and Morocco and with no impact in our lead times. So I'm very, very happy to say that.

This is a program I have already explained before that has a lot of benefits for us and for our consumers, for us because it gives us the possibility to test with very small quantities. And as we see that the style is successful, we then ramp up production, and that reduces the risk significantly.

That is very clear when I shared with you the real data of what we have achieved during this first half, that is a 58% gross margin in these styles overall, which means that taking into account these styles are exclusively produced in closer sources. So the initial margin is lower than the average of our own brands.

But therefore, we're doing in markdown is significantly lower. And obviously, that results in this 58% gross margin and a stock turn of less than 3 weeks. That is a great advantage. I think this is transformational and it can be transformational for ASOS as a whole.

The other thing is how it is connecting with consumers? And the reason why you see this picture, that is one of my favorite picture, not how to pronounce it because it's a [indiscernible] poplin top. I think they did it on purpose so that I cannot pronounce it, but anyway, this one -- the reason why we bring this picture is like this is probably the best summary of all the benefits of this program. We brought it online. We saw it was working very well, brought a repeat, sold 1,500 units in the course of the morning, keep on bringing it continuously, it's everyday top 5 sales in terms of number of units every single day, regardless of what we're offering regardless of the most incredible brands in the planet, regardless of whatever liquidation we do, this top is top 5 unless we run out of stock. And then also out of the top 5, then stock [indiscernible] and then goes up again.

It's quite remarkable, and it shows a lot of the power of this program. I think it's important to say that the power of this program is going beyond the sales is also in how consumers are talking about ASOS in social media. It's quite interesting to see how consumers are starting to identify ASOS as the first place to go and find fashion. And this is precisely what we want.

As I said before, today, we are at 5% of our sales of own brands, which places us in a comfortable place to reach the target for the end of the year, around 10%. And it creates, if you want a good platform to go to our more midterm ambitions that is to take it much further up to 30%. In that sense, just one small note. The fact that we have already moved out of the -- not move out, but expanded from the U.K. into other sources is a very critical thing to ensure that growth because, obviously, that gives us the possibility to open it to new categories like denim and wovens and that is very important, and that is quite interesting.

To give a little bit more of color on this Test & React program, just let me very fast deep dive on the first 2 categories where we started, which are Jersey Tops and Jersey Evening dresses. These are not irrelevant categories, altogether become 20% of the sales of our ASOS Design womenswear. So is there relevant.

One of them -- evening dresses already at 20% of sales coming from the Test & React, the other one is already at 40% of sales. So I think it clearly shows that this program can be taken to significant part of the turnover. The other thing that I wanted to highlight is these pictures you are seeing here are pictures from the social media of some of our consumers and how they are talking about ASOS and it's a completely different way of talking about ASOS, when they talk about ASOS as the first place to find fashion.

And actually, we did the test lately about where can you find [indiscernible], poplin, whatever, and you could count the number of brands where you can fund it with the fingers in only one hand and ASOS is one of them. So clearly, it's positioning us in the right place.

As I said before, the fact that we are already working with suppliers in other geographies that can work with different fabrics is giving us the possibility to go deeper in some of these categories by adding new fabrics, like dresses or adding new categories like denim. And as I said, very comfortable that this is only the beginning of a much bigger success story within ASOS.

Let me move into the second priority, which was to create stronger customer relationships. You will remember from our year-end, again, now recycling, another page from year-end -- year-on-end when done and Vanessa came and told us about how we were going to transform our marketing, give you one model within ASOS.

Without walking through the whole churn or worries, pretty much what we were saying is like we were going to move into full funnel marketing from mainly performance marketing. We're going to invest in stronger relationship with creators and influencers. So we were moving more social, if you want, and we were going to work into brand activation.

We said back 6 months ago that obviously this is a set of policies that takes some time to have impact. And at the beginning, we would be seeing leading and lagging indicators until we can see the impact on our sales. And obviously, today, we're still in the first part of this journey, taking into account that we only started in November -- end of November. So -- but we are confident that we will see this impact over time.

So going back to what we have done so far along the year, we started at the end of November, as I said, with our ASOS Your Way campaign, that is a campaign focused on the individual style of our consumers, a campaign really focused on our Gen Z consumers, and that's why we leverage on 6 star influencers for Gen Z even though we use overall 4 influencers. We had a reach of 500 million impressions. And it was pretty much London-centric. We did -- all our live activations are out of home.

Here in London, we [indiscernible] a lot of learnings we took. And we saw some interesting results, as I say, leading and lagging new customers growing by 10%, brand search also growing, direct visits. But it was more the learnings we got rather than the impact it had. We have used these learnings into our new campaign, our ASOS Unreal Finds.

And this is, if you want, a different campaign where we're positioning ASOS as a destination for style and a place to discover styling. And let me just...

[Presentation]

[Jose Antonio Calamonte, executive]

Just as a snapshot of the campaign. Three big differences between this company and the previous one. Well, this campaign is clearly social first. We are working with a wide range of micro and big influencers to reach an audience of 30 million unique users.

Our ambition is to have a much bigger reach of 1.5 billion impressions. So it's almost 3x the level of impressions to 9 different channels. And this is much more of a national white campaign, it's going to be activated in 8 cities, rather not only in London. We keep on learning on it and we are confident that this is going to reinforce the messages that our improved assortment is sending to our consumers.

But as I said before, our change is not only -- the way we strengthen our relationship with our consumers will not only come from marketing, it will also come from their experience on site. And just to share an example with you, we decided to revamp to change to upgrade by the functionality.

We started at the beginning of the half. As of the end of the half, we have already implemented that in 42,000 options by now is 52,000 options. Our ambition is to reach 50% of the total assortment by the end of the year, and we think we're in a good place to reach that. This is a functionality that builds in some of the unique capabilities of ASOS, the capacity that we are multi-label. So we offer our brands and third-party brands, our differential capacity to create styling and outfits and the regional language of our studio.

What we have seen is that the customers are engaging really strongly with this functionality, customers buying through -- by the look have a 55% bigger basket, which is quite remarkable. And if you want to think that it's also quite remarkable customers using that tend to be younger and more fashion engaged. So it is very, very interesting functionality. And if you want is another example of a win-win relationship because we're doing something for our consumers so that they can buy better, and we also benefit. So it's a little bit like Test & React, and we are really looking for this flywheels where everybody wins.

Moving into the third pillar, which was our obsession with optimization and reduced cost to serve. This is a little bit this mentality of continuous improvement. And happy to share with you that during the course of this first half, we have reduced our fixed cost 20%, which is faster than the reduction of our sales, if you remember. And we have also reduced our variable costs as a percentage of sales, obviously, in -- in 80 bps, which means we are more efficient.

I think it's quite important to say that -- you know I'm a big fan of images, and I've been torturing you for months with the famous fresh fish. No worries, not fresh fish today. This is the new image for the season. The new image for the session is Formula 1. That is quite popular in the U.K. So I'm pretty sure he's going to resonate with you better than fresh fish. And the image is along these lines. In Formula 1, they go for a lap, they stop, they move a little bit. They go for a second lap. They improve just a little bit, 0.1% of a second, but then they do it over and over and over again, and they question everything every time.

I don't know if you've ever seen how they train this process of changing the wheels in life. I did it once and it was shocking. You have 10 guys doing that 100 times over and over and over again. They train absolutely every single gesture to make sure that they can change the tires and refill the tank in 2 seconds or whatever. It's quite remarkable.

This obsession for the detail and this obsession for reinventing everything and questioning everything every day is our obsession with cost optimization of operational excellence. This is our obsession. This is the driving force to make sure that we deliver here.

During the course of this first half, these improvements have come mainly from 2 sources. One of it is logistics and so warehousing, distribution and so on and so forth. Obviously, the reduction of stock and the subsequent reduction of our logistics footprint plus a simplification of the delivering partners plus our renegotiation of certain contracts has taken us to reduce our delivery cost per unit by 20%, and I think it's quite remarkable, especially in a moment of losing size of deleveraging the core space.

And it is also, obviously, the reduction of the footprint has helped us also with the fixed cost of logistics and also is having a lot of work here in the headquarters with fixed costs, obviously, with a number of people. As you saw, we have been very cautious with that, and we have done some activities to reduce, but also with every single overhead cost to make sure that we are as frugal and as efficient as possible. This has been the main driving force during this half. As I said, this is only one more lap. So this car is stopping again, we're going to do it a little bit more and gain another half of a second or whatever.

This time, we're working a lot about the use of data and the effective use of data and that would not be a surprise because that is happening everywhere, but we are also working on a lot of the automation of our processes through product life management systems and so forth. So this is only the beginning of a journey that will never end. We will always be talking about this operational excellence and making sure that we are as efficient as possible. And with this obsession that you can always reinvent the business every day, there is always a possibility to improve.

So let me just summarize the key messages before I hand it over to Sean to give you a little bit more details. So if you want our arching message, we have done a significant, if you want, development or achievement in terms of our transformation. Remember, this is a transformation. We're already transforming the way we work. As a result of that, happy with the cash generation, the best cash generation since the first half of 2017, GBP 240 million better than last year, supported by we have done the heavy lifting in the stock reduction with a very active management of the old stock and the in-season stock and also a very disciplined approach into cost that will never end.

Also very happy with the development of the more, if you want, substantial transformation of the way we operate with consumers, the main 2 examples that, as I shared with you, is Partner Fulfils and Test & React, but there are many other.

So with that in mind, happy to bring stay to reaffirm our guidance for the year and as a way to unlock the value that will be will be unlocked during fiscal year '25 on going forward.

So with that, I'm going to hand it over to Sean, so that he can give you more details about our numbers. Sean?

[Sean Glithero, executive]

Thank you, Jose, and thanks, everyone, for joining us. So here's our usual summary slide showing you some of our key metrics. Sales were back 18% on the year as we cycle the profit actions taken during the course of last year, which were mostly in H2.

Intake was lower by around 30%, resulting in reduced levels of newness on site. Gross margin suffered due to heavy discounting to clear our older stock, but the flip side of that was in our free cash flow performance. This was GBP 240 million better than last year and our best performance since 2017, with an outflow of just GBP 21 million.

Looking ahead, gross margin will recover in future years due firstly to the elimination of aged stock in our new model. And secondly, from the lower discount debts we plan over a product life cycle. I'm really pleased with the performance on cost to serve. That's defined as adjusted operating expenses, excluding depreciation and amortization expressed as the percentage of sales, and that was down 120 bps, this is despite the deleveraging impact from falling sales and the incremental investment into brand marketing and was achieved by way of great progress in both fixed and variable costs, as Jose just outlined.

Whilst the cost to serve improvement more than offset the volume impact, the additional discounting we employed declaim to cleanse our stock resulted in an EBITDA loss of GBP 16.3 million for the half. However, we've reiterated our guidance for positive adjusted EBITDA for the full year.

Net debt has fallen by GBP 83 million from this time last year through a combination of cash generative H2 in FY '23 and a small cash outflow this half. Ultimately, our performance in the first half is primarily a function of the action we've taken to prioritize rightsizing our stock ahead of FY '25. And I'm really pleased to say these actions mean we've achieved our full year stock target of less than GBP 600 million ahead of time as outlined in the chart.

The more astute if you may have noticed that this slide isn't our usual KPIs, which are still included in our statement and our release this morning -- we released this morning and also on the next slide, where we cover our segmental performance.

However, the strategic indicators listed on this slide are more up-to-date reflection of how we are thinking about running the business and what our progress should look like. As you can see, Test & React has reached 4.9% of own brand sales at the end of the half from nothing a year ago. Likewise, flexible fulfillment, which will ultimately encompass both Partner Fulfils and ASOS Fulfils reached 2.2% of GMV, an increase of 160 bps on H1 FY '23.

Adjusted gross margin is back 260 bps year-on-year and 280 bps on a 2-year view, to 40.3% due to that discount in older age stock. As outlined, cost to serve has fallen 120 bps and with variable contribution or order falling 4% as the efficiency measures can't fully offset that softness in our gross margin. And -- but on a 2-year view, we're plus 5%. Pleasingly, with all the changes we've made, we're seeing our stock work much harder, with stock turn up more than 30% on the year as we've reduced the quantity and improved the quality of our inventory.

But looking at the segmental performance. Basically, what we're seeing in the headline numbers is a continuation of the regional variation that we've highlighted in past results and a reflection of the severity of the profit actions we've taken in each of the regions. As such, rest of world in the U.S. have experienced a more pronounced impact on sales than the U.K. and Continental Europe having previously been less profitable. Between the U.K. and Europe, consumer sentiment and the wider macro backdrop have been the main differentiating factors.

We move on to gross margin. This slide really shows the scale of the additional discounting we've undertaken to clear that old stock, whilst adjusted gross margin was down 260 bps overall, the impact of the markdown was more than 300 bps, which is then partially offset through improved freight rates under our contract with Maersk as well as improvements in our buying margin resulting from sourcing improvements.

You'll note there's a minimal impact on H1 gross margin and surcharges on ocean freight imposed in relation to vessels being rerouted to avoid the Red Sea. This will instead modestly affect gross margin in H2 as we sell through the rerouted intake, but we expect to offset these impacts further down the P&L through other supply chain savings.

In terms of cost savings, we've made excellent progress on reducing our cost to serve against that backdrop of decline in sales. We've achieved 100 bps reduction in distribution cost as a percentage of sales and 130 bps in warehouse, resulting from both the actions taken in FY '23, including cessation split orders and closure of ancillary storage facilities, but also new initiatives introduced into the first half of FY '24, such as renegotiation of delivery partner contracts across each of our major regions and elimination of extra storage sites.

While marketing and other costs have increased by 70 bps and 30 bps, respectively, as a percentage of sales, you can see from the chart on the right that both have fallen in pound terms. This is even after taking into account of the additional marketing investment into U.K. full funnel activity as set out at the start of the year.

The net impact is a cost to serve of our activities being 120 bps better at 41.5%. If you follow that through to adjusted EBITDA, you can see that our progress on cost to serve has more than offset the impact of reduced volume in the half. The EBITDA loss is therefore attributable to the high levels of short-term discounted to clear old stock ahead of the full rollout of the new commercial model in FY '25.

Just briefly on the adjusting items. The majority of these relate to the closure of the Lichfield Performance Center, which we previously indicated, and that's expected to yield an annual cost saving in the region of GBP 20 million per annum from FY '25. This site was not -- will be [ not boarded ] at the end of May, but has ceased to fulfill orders already in H1. We have yet to formally market it. And in the absence of a firm offer, a noncash impairment charge has been booked against its value.

Of the GBP 150 million of adjusting items in the period, 80% of this figure is noncash, with the remaining GBP 30 million expected to be cash settled in future periods, including GBP 16 million of automation spend at the Lichfield site that has not been capitalized in H1.

And then finally on to cash flow. Where we -- as I explained, we experienced our best H1 since 2017, with an outflow of just GBP 21 million due to strong progress on inventory. Accordingly, bridging from adjusted EBITDA to free cash flow, you can see that the largest items relate to working capital and CapEx. CapEx of GBP 86 million or GBP 66 million excluding Lichfield is consistent with our guidance for GBP 130 million of CapEx on an ex Lichfield basis for the full year.

And in the half, the spend is roughly split GBP 30 million on investment in supply chain, including GBP 20 million on Lichfield and GBP 55 million on tech CapEx that's prioritize in areas such as Test & React, flexible fulfillment and customer experience improvements. GBP 175 million relates to the reduction of our stock balance to pre-COVID levels, which is partially offset by working -- other working capital movements, including a reduction in payables as we continue to reduce both intake and operating costs.

Together with interest and other movements, cash outflow in the year -- sorry, in the half was GBP 21 million, which when you add that to the noncash movements result in net debt of GBP 39 million higher than at the FY '23 year-end. However, as a result of the GBP 238 million improvement on last year's H1 free cash flow, we saw net debt closed the half at GBP 345 million, GBP 83 million lower than this time last year. And that net debt includes a strong cash position of GBP 332 million with more cash to be generated in H2.

And on that note, I hand back to Jose to warp up with a few words on our outlook for the second half.

[Jose Antonio Calamonte, executive]

Thank you so much, Sean, and to see if I'm lucky -- just a couple of slides. I promise I'll be brief so that we can go into Q&A. So what is it that we're expecting for H2? Well, we need to finish the job we started. And that means if you want to be more concrete, we need to continue working through our stock. As I said, we have done a heavy lifting, but that doesn't mean we have finished.

So we will continue dealing with the old stock and bringing the new stock to make sure we normalize the shape of our stock, which will have a set of impacts, positive, in terms of our capacity to sell, but also in our capacity to generate gross margin as you have seen the gross margin we have generated during this half has been clearly impacted by that shape.

The second thing will be, we will continue with the transformation of the business with scale in Test & React. We're taking Partner Fulfils even further. There are other programs I have not mentioned like speed to market. So all this is going to be part of this half because obviously, the ultimate goal is to make sure that we can really deliver this transformation of the underlying business.

The third one will be we will continue strengthening the relationship with our consumers through our changes in marketing but also through our changes in this fashion-led customer experience. So there will be new features coming, and we will continue deploying our campaigns.

And last but not least, we will continue ingraining this culture of continuous improvement. Remember, the picture of the season is going to be the Formula 1. So you will see it quite often, probably next time I will come with a Formula 1 T-shirt. So that to remind everyone.

So as a result of that, we are comfortable of restating the guidance or confirming the guidance, probably is a better, word that we gave at the beginning of the year, which is sales somewhere between minus 5 and minus 15. Adjusted EBITDA, positive; stock below GBP 600 million. But as you already know, we were already there. CapEx, excluding Lichfield, GBP 130 million, free cash flow generation and a reduction of net debt.

As I said before, this is the way to really unlock the real value of our new commercial model and the transformation of our business. And we are very confident that by the end of this year, the company is going to be in a significantly better position to do that.

And with that in mind, I think it's enough of me, and I'm going to hand it over to you for Q&A. Thank you so much. I will take a seat here.

Sorry, I forgot to say Michelle is going to be coordinating the Q&A.

[Michelle Wilson, executive]

[Operator Instructions]

[John Stevenson, analyst]

John Stevenson with Peel Hunt. One question to come. I've got 3 if I can squeeze 3. Can you just comment on the U.S. position to the extent to which the strategic issues of a speed to market test for Partner Fulfils, to what extent are they starting to become a feature in the U.S.? And can you talk about how you or whether we start to address the U.S.?

Second question, easy numbers one, just in terms of the gross margin rebound potential for next year, assuming we're not going to let into another sort of international crisis. Is it just as simple as [indiscernible] on clearance coming straight back in [ May ] discount, coming back in and we're literally going to see a 400 bps rebound straight in?

And final question, I guess, could you just comment on how you rate the current customer base? Are you actually seeing [indiscernible] coming in, in terms of customer acquisition between that, obviously, attrition in overall [ activities ]?

[Jose Antonio Calamonte, executive]

Okay. I'll do my best. Sorry, Sean, how do you want to do that?

[Michelle Wilson, executive]

Do you want to start with -- Sean, do you want to start with the gross margin rebound next year? And then how is it if you come on to U.S. when we start to see the U.S. proposition improving? And then I think the final question was on the customer base and when we expect to rebound in the customer base?

[Sean Glithero, executive]

Yes. So on the gross margin, we've seen that sort of 300 bps hit this half and the discounted. It's probably -- so cumulatively against the model we want to be operating the 500 bps impact from the sort of the old and aged stock. And then as we work through that stock and then we actually improve with the newer stock as well. That's what's given us confidence of getting towards that medium-term guidance of -- towards 50%. Next year is going to be a journey towards that as we outlined. But certainly, our guidance for next year is 6% EBITDA margin will be underpinned by that gross margin improvement.

[Jose Antonio Calamonte, executive]

So let me go on the U.S. first and then the customer base. So in the U.S., as we said before, the U.S. is one of our core markets. We have not changed that. So it's still one of our core markets. There are some natural difficulties to take some of the initiatives there, as you may imagine, so it takes more time. But for instance, Test & React is already active in the U.S., not at the same level of the U.K. and Continental Europe, but it's already active.

And what we're seeing is that the reaction of the consumers is equally positive. So no, it doesn't really change. So we will continue taking it there at the appropriate pace so that we can really transform the relationship with our consumers in the U.S. As you have seen in the numbers, it has had a bigger impact in terms of sales that is not coming from the fact that the new initiatives are not going there. That is coming from the fact that the type of action we took in the U.S. was deeper.

In terms of reduction of marketing, in terms of cost of deliveries, in terms of management of the assortment, so it was a deeper type of -- I mean, I don't know the word manipulation, the interaction we had with the assortment in the U.S.

The good news is by the end of last fiscal year, the U.S. was positive in viral contribution, and it remains there. So we had the impact that we wanted to have.

[Sean Glithero, executive]

On the current customer base, obviously, we have seen a reduction of 14%. And I think, clearly, part of this reduction is part of our delivery [ reductions ] to reduce part of our sales, but we're unprofitable. That is quite clear, and we've never been shy to say that. But we're also doing a lot of things that is engaging with these newer and younger consumers. And I made a couple of fast comments during my presentation. One of them is Test & React. We see that the customers buying Test & React are younger on average and more fashion engaged. So it's the type of consumer we are looking for. The same would apply to the customers that are interacting with our by-the-look feature.

So we see that this is helping us to improve to improve the relationship with our customers and to bounce back there.

[Michelle Wilson, executive]

We go to Warwick in the middle there.

[Alexander Richard Okines, analyst]

Warwick Okines, BNP Paribas Exane. You just building on that last answer that I was interested to hear about what sort of evidence you have of your ability to convert customers who were previously buying a discount to full price? Or is the shift in some of these new initiatives really just acquiring a new younger customer, perhaps you're leaving some of the older customer base behind?

[Jose Antonio Calamonte, executive]

Yes. Yes, that's a great question. Well, obviously, let me take a little bit of perspective here, if you don't mind. That was the original [indiscernible]. This was a place for fashion, not a place for discounts. Then we'll go into let's grow faster, let's add some discount, let's go in faster, let's add performance marketing on top of the discount, let's add more, set more buying or now we have too much stock. We need even to more discounts. So we go into this look. And this is -- part of this, if you want, fundamental transformation of ASOS is about going back, as I said, that's what this back to fashion to these origins of ASOS.

You might think, well, there's a little bit of wishful thinking what you're saying because why consumers would do that. What we see is then we do our job, consumers react positively. I think Test & React is a very clear example. When we do the right things, they come -- it flies out of the shell or the site in that case. And we sell 1,500 units in the course of a morning and it's consistently top 5.

I acknowledge this is a small part of what we do today, but let me show you another piece of data. Today, 60% of our sales are happening without promotion, which means their customers are engaging into that journey with us. When we give them what they want, when our new collections are better, they engage because what they want to buy is fashion at a fair price, not necessarily at a discount.

Everyone wants to say here. I never said we want to completely eliminate discounts. We want to take discounts to a rational place. Black Friday, Spring Fling, that is always going to be part of ASOS, and that's okay, but it has to be at a reasonable price. And it's quite normal -- I mean it's quite disinterest. We will never eliminate mistakes. So there is always going to be clear, but we have to take it to a reasonable place, not down to 0. But we see evidence today that customers are engaging with us in that journey.

[David Hughes, analyst]

David Hughes from Stifel. Three questions from me, please, if that's okay. First of all, on the sales performance that you've seen, are you able to give any flavor about how much of that would you say is driven by those profit mixes versus what you might view as a bit of an underlying sales performance that you're kind of seeing in naturally?

And on the stock resizing, obviously, you've improved that through both reducing the newest -- older stock but also kind of more efficient on the newer stock. How much older stock would you say you kind of still want to get through? And what does that make your medium-term target on stock levels? And then finally, with all the profit improvements, are you seeing kind of movement on returns rate and seeing that come down as you can get of some of those less profitable customers?

[Michelle Wilson, executive]

Okay. Maybe, Sean, do you want to start with returns rate and then Jose can come back on the stock levels and the first question around the sales mix.

[Sean Glithero, executive]

Yes. So I think with return rates, the starting point anything has to be that are the model that you must have returns. It's part of the core to the offering to the consumer. So we are conscious about return rates and we want them to be lower, but we recognize there is always a place for returns. Returns is also very much a function of the geography to sell in, place it in Europe. Germany is particularly high. Other countries lower.

So the mix -- the sales mix will be driving your returns. The product mix will be driving your returns. Again, will we get it right in terms of fashionability, it will keep the product when we get it right in terms of with our third-party brand, we get the right size, we get the right pricing for the quality that will be helping our return.

So it's a long way of saying that there's a lot of moving parts and returns, but the benefit we are seeing better returns. Some of it is structural to do both mix of countries and products, but it's also a function of the initiatives and the focus and the data we're using to isolate those products that perhaps have got a high return rate. We work out wide. We also -- customers have got a high return rate.

So returns are improving, but a lot of it is structural, but it's our initiatives as well.

[Jose Antonio Calamonte, executive]

So on your first question on sales and the split between what is what we have done and what is the market, it is difficult to tell you to be honest, it's probably the million-dollar question. If I can take a little bit of a perspective again in this question, what we are doing is -- this is really a transformation. And as part of the transformation, we said that is part of our sales. But it's clearly unprofitable and will be -- probably the word is not happy, but we will accept that we need to take action to tackle it because I think you've seen nothing and English is like sales is vanity, profit is sanity.

So we are more on the sanity than on the vanity right now. But if I can illustrate a little bit more on where we are, we have done a lot to have a negative impact on the sales during the last months. We have reduced intake by 30%. It's not a little bit. It's 30%, it's a sizable impact. We know that the amount of newness has a direct impact on our capacity to sell. We have -- so we have reduced aggressively the older stock. So it has created a certain level of cannibalization with the new stock, especially in some lines, not everywhere.

So we know we have that in some countries, we have reduced marketing to a level of rationality. So we have had relevant interactions that we're going to have an impact. If you want -- the good side of it is to see how our new collection is performing. We have sold 83% of it, 40% faster on average, 30% faster stock turn, Test & React performing well. So we see that we are in the middle of this transformation, and it's always going to be hard. It's hurting on sales. And as you've seen, we have done a lot to improve profit, and we don't see it because it's hurting on margin because of what we're doing.

But the purpose is, as I said, it's silly to unlock the full potential of this model. So there is a lot on what we have not to be honest. Sorry, very long answer to your short question.

Then on the stock sizing and how much old stock we have? This is an interesting one. Let me try to elaborate a little bit on this one. We said, I think, back in -- at the end of last year that we have already cleared, if I recall properly, it was 84% of the old stock we have. So we have done a lot of work last year.

During the course of this half, we have tackled a lot of the remaining autumn/winter stock and 50% of the stock reduction is coming from that bucket. We are happy with that. We think it's a good level of achievement. We have also done a lot of work to avoid that, that happens again.

The autumn/winter of this year, we have reduced the leftovers by 2/3, which is a significant amount of reduction. And -- which means that the remaining part is the old -- sorry, the old spring/summer that is still in our books or in our warehouses. We are going to finish the job during the second half, and we are determined to do so. That will not mean a reduction in total numbers, that will mean a normalization of the shape of our stock.

[Michelle Wilson, executive]

Next one from [ Georgi. ]

[Georgina Johanan, analyst]

Georgina Johanan from JP Morgan. Just one for me, please. There's lots of sort of moving parts isn't there in terms of your stockpile, like reduce the intake by 30%, faster buying on the Test & React and so on and lots of moving parts. I guess, just a bit more holistically, I'm trying to think with regards to next year, you're obviously guiding for growth presumably, we're only sort of 4, 5 months away, you are having to put in orders with your wholesale -- your third-party brands and so on and so forth.

How should we think about that? Like are you buying for growth next year? Or is it about still buying for a reduction in sales and then kind of chasing that opportunity if it comes through? And I guess that all ties into kind of risk mitigation into next year if that demand isn't there, be it ASOS specific or external? I hope that question makes sense.

[Jose Antonio Calamonte, executive]

It makes perfect sense. Thank you so much. And actually, it's a really good question. So there are many different ways to face how do we prepare a season. We can take a very, let me say, generous way, the generous probably is not the word, probably not tight enough way of doing it. If you're going to sell plus 5, you need to buy plus 5 because that ensures that you have enough stock to deliver the sale.

I don't think that is the right way to do things, and this is not how we're doing things. we buy tighter. We are always trying to get more from our stock. The way to get more from our stock is either to buy more units or to buy more at full price. And we're always trying to get more from our stock. We are always demanding more from our stocks. We want this obsession -- this Formula 1 image is [ this obsession ] of improving every season a little bit.

So we are not buying with abundance. We are buying tight. But we are -- when we buy, we ensure that we're buying enough to support that -- the level of growth we are targeting. The other thing that is worth mentioning is like, when we define a purchase budget, we don't buy everything in one go. The more capacity we have to react fast, the more we can delay the decision until we have more information.

So all these initiatives, we are adding to gain flexibility in the company, Test & React, speed to market, Partner Fulfils, is giving us the capacity to aim for that purchase without purchasing it today. So obviously, it's giving us a better capacity to manage that. So if you want -- putting it all together, are we having the capacity to deliver that growth? Absolutely, yes.

The beauty is that [ versus ] the approach of a few years ago, we can do that, building much more flexibility into our approach into the season because of the improvement of the flexibility of the company, but also because of the fact that we are every year targeting for an improvement. I don't know that kind of make sense or not.

[Michelle Wilson, executive]

Adam?

[Adam Cochrane, analyst]

Adam Cochrane, Deutsche Bank. A couple of questions, please. On the cost to serve reductions, can you just confirm that these are all strategic cost reductions rather than you've just dived to the line, we need to create cash. That's just our head office headcount make people sweat and work a bit harder, but it's not a sustainable basis. And that's what you go to the warehouse and this -- just some confirmation really that it's an ongoing business plan, business model change rather than a sort of excess cost-cutting basis.

And then secondly, just to confirm, through this changing business model, have you lost any third-party brand partners that you didn't want to lose. I know that you've rotated some out by choice probably, but of all of your branded partners have been supportive of what you're doing. And on this, when you're talking about reducing the discounting and the promotions, how easy is that to do in third-party brands where they might be market-wide promotions? Do you need to market to improve on some of those areas rather than the bits where on your own brand, you can improve very much your own product. So on the third-party bit, what can be done?

[Michelle Wilson, executive]

Sean, can I ask you to tackle the question on cost to serve and then Jose the 2 questions. The first one was on have we lost any brand partners we didn't want to lose on the second one on discounting and third-party brands.

[Sean Glithero, executive]

So the short answer is it is [indiscernible]. It's not a diet from the line. This is thoughtful with cost reduction. It's -- if you think about the journey we've been on, we've done a really good job in supply chain. The extra stock caused us to take on extra cost, reducing that stock if we can reduce that extra cost that we took on. So that's gone, and that's always meant to be gone because stock is down, but also the team have been focused on relentlessly looking to improve the net new contracts new way to work in.

So it's a discipline that's all the way through. And you see that in every piece where it's transaction costs, my team are looking at new deals that come so at 10 bps of. So -- and then so you've seen over the time and then the fixed cost, we are getting more efficient. We are spending money on technology. We're investing in efficiency. We're using data better. We are improving all the time. So it is the same.

[Jose Antonio Calamonte, executive]

[indiscernible] on this one, we have reduced our logistics footprint, but we're still comfortable that we have a footprint be enough to support ASOS until the end of the decade and beyond. So it's like the fact that the merchandise is working 30% faster, we went in very simple terms means that we can sell -- serve 30% less sales with 30% less footprint is significant.

So I think it's only to reaffirm what Sean said. On the third-party brand, where I'm very happy to say that no, we have not lost any relevant third-party brands in this journey. I think it's the opposite. We are very happy to announce that we are adding brands as relevant as ARKET or Vega and we have a very strong relationship with the strongest brands in the world, and that is if you want shown by the fact that we are getting access to the hottest product to the best selection of the product.

So I think that the reason is like we offer a unique proposition for these brands. There is no one really that I'm aware of in the mass market [indiscernible] proposition like ASOS, whereas this multi-brand approach, but it's totally integrated, is perfectly blended.

And as I said back in October, this capacity, for instance, for the sports brands to show them in a fashion context or for some of the fashion brands to approach new consumers and new occasions is very highly appreciated by the brands, and that's why we have this one really high ranking in terms of the retailers probably higher than what our size would suggest in most cases. So no, no, we have a very strong relationship.

And that maybe one other thing we manage relationship within the realm of the partnership. When we need to discount, we share with them. So that also helps create this idea of partnership rather than a more transactional approach. And then when you were saying how you see it is to reduce discounts on third party, that is a great question. Obviously, we are not -- we are aiming to be as competitive as the market.

So if the market is reducing at the price of something, we end up matching to a certain extent. The market is an abstract concept, not the most aggressive, but we tend to match the price of the products. We are not aiming to be cheaper, but obviously, we cannot afford to be more expensive. But that was not the situation before. In some cases, we were more aggressive than the brands. So there is room or there was room to get there.

So -- but we -- normally, the brands would never worry about us much in their prices. They worry if we are more aggressive. And this is what we don't want to be.

[Adam Cochrane, analyst]

So I think it was about a year ago, you talked about a long tail of customers, some [ 6% ] of them, mostly hundreds of millions. I think you are [indiscernible] lipstick by 15 times a year. And I was wondering how much has the fact that you've needed to discount stock and being more promotional sort of delayed the ability to read yourselves as those loss-making customers?

And to what extent there is difference in the actions of customer lifetime profitability or the new ones that you're getting through the door from by the look and the marketing campaigns that you're doing, if you got any sort of color on that please?

[Jose Antonio Calamonte, executive]

Let me try to refresh. I'm not sure I understood what you were saying. The fact that we're reducing discounts, if this is making it more difficult for us to read the profitability of customers. This is what you...

[Adam Cochrane, analyst]

The fact that you are having to clear the old stock is probably maintaining some of that tail of loss-making customers or making it harder together.

[Jose Antonio Calamonte, executive]

[indiscernible] to read probably yes. When we lose customer -- sorry, when we lose money with our customer, there might be a set of reasons why. One is they're buying stock with very high discount so the fact that we're discounting would bring noise into that. Second is like the returns rate is abnormally high. That doesn't necessarily change with more discount or not. And third one could be the cost to serve that customer, normally coming from the marketing side, it might be coming from other areas, but the cost of service too high. So we can still read the other 2 very clearly, and this is where we've been acting with a very decisive action.

In terms of the average gross margin of the basket, you're right. The fact that we have been discounting could bring some noise and some customers that today we see they are not making a lot of profit, they might make profit with a different stock profile, they're right. But we have not been acting on the slightly negative customers we have been acting on the more negative customers than in 99% of the cases, we're really having a big impact on returns rates. So it was clearly driven by returns rate and also cost to serve on this year for whatever reason. Does it make sense?

[Adam Cochrane, analyst]

Okay. And then finally, the convertible bond is sort of getting close to maturity. If there's any thoughts on the refinancing [indiscernible] difference?

[Sean Glithero, executive]

Yes. So I think by maturity, we've been pretty clear in our disclosures and things were known in the market. Our convertible bond is due to repayment April 2026, that comes around sooner than you think, and it's in our planning. We have medium-term forecast, that is taken into account. So thinking about the options on that. We still have time to work that through, but we are actively thinking about that. And I think we will update the market when we've got something to say. But we're very conscious of it. We put it into our planning, there's a variety of different ways to think about it. So it's part of our job.

[Yashraj Rajani, analyst]

Yashraj Rajani, UBS. So the first one is just a follow-up on gross margin. You mentioned that you still have some stock to clear in the second half of this financial year. Can you give us a rough ballpark of how much of impact does that clearance have on the gross margin? And also, are you confident that some of the initiatives like newness and Test & React is more than enough to offset that and bring a positive improvement year-on-year?

The second question is on ASOS Fulfils, which you spoke about. So again, is that sort of solely focused again on the U.K. at the moment? Or is that also going to expand in some of the other regions? And can you give us some idea of how competitive that offer is versus the likes of Zalando's fulfillment business or next total platform?

And then the last question, apologies if this is a low-quality question on March, but just wanted to understand now that you've seen March trade through with some of the new collections of spring/summer, how competitive are some of your new collections versus the likes of competitors like SHEIN and Primark?

[Michelle Wilson, executive]

Okay. So first one, Sean, if you can tackle on gross margin. So roughly how gross margin in the second half will look compared to the first half. Jose, I think there are 2 for you, so ASOS Fulfils, how competitive is the ASOS performance solutions versus competitors and then March trading is the current trading question.

[Sean Glithero, executive]

So I mean, gross margin, the way I think about the second half, it's going to be broadly maybe 2 things. So in terms of the new stock we're getting in, we know it's performing well. It's -- as we've outlined, it's selling with reduced discounts, it's having a big margin. We've got the Test & React with scale in as well. We've got performance scaling as well. So sort of the new lock will be supporting improvement.

But on the flip side, we've still got some old and aged stock that we need to clear. And while we've not been more specific around gross margin is we want that flexibility to do the right thing. And the right thing is about setting ourselves up for growth next year and gross margin growth, and that's going to be about having the clean stock profile.

So we see lots of positives in terms of our core new operating model, but we've still got some old to tackle. So it's going to be a function of those 2 things. The other thing I would say is seasonally we tend to have a lower gross margin in the first half because of the Black Friday, et cetera. So -- and then second half may -- look, the other factor is actually an intake coming in, as Jose said, that's going to improve the newness and improve the margin. So those are the moving parts.

[Jose Antonio Calamonte, executive]

So in terms of AFS, that I guess is what you referred to. We started testing in the U.K. for obvious reasons because it was easier, but the ambition is to develop -- to offer that in all our -- from all our warehouses, so U.S., EU and U.S., U.K., sorry, EU and U.S., I said 2 times U.S. And that would sell [indiscernible] ASOS as a unique partner to do that because a lot of the partners, not the only one, but at least in the world of fashion, a lot of the partners that are offering that and doing more regional.

So for our brand, it's very committing to have a one stop shop where you can have a fulfillment solution that applies in all these 3 geographies. And I think that is quite interesting. So our ambition, it is to offer it. Obviously, we will go step by step. We start with the U.K. and then you -- and finally the U.S., but we'll do it.

We are having conversations with partners to do it in the 3 geographies. So that is the ambition. And in terms of pricing, you asked if we are competitive, we are competitive. Obviously, we are designing the solution with being competitive in mind. And that's why we're having ongoing conversations with partners. So we know we're competitive because they also work with some of our competitors, and they know the price and that is -- that makes it very interesting.

Let me be [indiscernible] add that, obviously, AFS is not only a good solution in terms of logistics it's also the solution in terms of access to our fashion-loving 20-something, 21 million consumers that enables for certain brands that are very local to [indiscernible] geographies at a very interesting price.

The question about March and the relevance of our collections versus the likes of SHEIN and Primark. Well, first of all, we -- I mean, I'm not going to say we don't consider SHEIN and Primark our competitors because that will be ridiculous, but we are not competing for the cheapest products. And that will be very consistent. We want to bring consumers fashion at a fair price. We have been working very hard on our prices to be competitive and to be in the market, and we are comfortable we are in the market, but we are not aiming to sell the cheaper dress in our stretch of imagination.

What we are seeing of the performance of the new collections is good. As I mentioned before, newness is performing well. Test & React is clearly flying. But even autumn/winter, we closed autumn/winter with a 40% stock turn with 17 points higher sell-through. We are seeing that the stock on continues in the spring/summer, and we are confident we will have a similar behavior.

[Michelle Wilson, executive]

Okay. I think we've got time for one last question from Matt.

[Matthew Abraham, analyst]

Just a query Test & React, please. So you referenced the gross margin on Test & React 58%. Just wondering if you have any thoughts as to how that margin evolves as Test & React expands across the business?

[Jose Antonio Calamonte, executive]

Okay. So we don't have any reason to believe -- sorry, I can see -- we don't have any reason to believe that, that is going to behave differently. What we measure -- we measured a lot of things in Test & React, not only gross margin. We measured the amount of options that we end up repeating or building upon them, the amount of options that we don't, the sell-through every option. We measure quite a lot of KPIs.

The reality is that what we're seeing is like the fact that we launched very short productions, like 100 units to test the value of that style, enables us to detect where it's not going to work and eliminating with very small quantities. So then the fact that we are already hitting a significant amount of options, and we end up repeating dilutes this hundreds of the mistakes really, really fast.

And [indiscernible] dilution ends up with a minimal impact on the gross margin. So as long as we maintain our hit rate in terms of the options we repeat and expand, the margin should not suffer a lot. The thing here is that what is driving these hit rates? I want to try those.

And one of the things we see is that the longer we work with a supplier, the higher the hit rate gets. The supplier learns about the way we work, learns about our consumers and then this cooperation becomes better. So if anything, we could have the hope that Test & React could even got even better. Let's not be super ambitious, but we don't see any reason why the margin should decrease not at all.

[Michelle Wilson, executive]

Great. I think that's all we have time for.

[Jose Antonio Calamonte, executive]

Thank you so much, then, everyone, as always, and looking forward to seeing you on the October, November, whenever that what I mean, I guess, October year-end results. Thank you.