Following a shock profit warning in December, Asos’ half-year results laid bare the extent of its problems.

In a radical departure from its usual growth story, the etailer’s profits plunged almost 90% as sales growth remained subdued.

By ploughing greater investment and focus into overseas logistics and transformation costs – a move which dismayed investors at the time – Asos took its eye off everyday operations, causing damage across the whole business.

So what exactly has gone wrong and how does the retailer intend to fix it?

American nightmare

Over the past three years, it has invested around £500m into its technology and warehousing across three territories – the UK, the EU and Atlanta in the US – to which chief executive Nick Beighton attributes the disruption to its profitability.

After opening its Atlanta warehouse in February, the fashion retailer underestimated its demand and traffic to the US website, which exceeded its forecasts, leaving the understaffed warehouse to deal with a “substantial backlog” of orders.

To clear the pile-up of orders, the UK warehouse in Barnsley helped fulfil them while Atlanta dealt with its staffing problem.

Warehouse staffing in Atlanta has now nearly doubled from 869 prior to the launch to 1,532 to restore operations while it continues to “make customer-facing improvements” after leaving many US shoppers disappointed. It has now put in place targeted marketing campaigns to try and win over customers whose trust it broke. 

Beighton admits Asos didn’t quite “look and feel as good as we normally do in front of customers, and customers move very, very quickly”

Interestingly, Asos only created a chief operating officer role in December, giving former supply chain director Mark Holland the job. Arguably, a business of this size and complexity needed that role all along – it’s hard to see how an operation of this scale scale could be executed smoothly without it previously in place.

While trying to protect its logistics capabilities, Asos reduced its performance marketing and, in turn, damaged its new customer growth and general traffic.

This issue was exacerbated by “instability” in SEO performance, which led to a decline in search engine ranking results.

Asos said that while this was damaging in the short term, it was “strategically the right thing to do” and added that it was working hard to rectify it and could see “early signs of recovery”.

Product problems

While profits plunged, sales, although lower than previous years, were still up 13%, with third-party brands up 18%.

Asos Design had a more challenging season at just 5% growth and, with higher-margin capabilities, its lack of growth hindered profits when it should have driven them up.

Asos has proved that it has the capability to launch winning own-brand offers: new own-brand Collusion has been the most successful brand launch ever on Asos and sold 1.5 million units in the first half.

It will now turn its attention to boosting the Asos Design range, which has hit £1bn sales, with more exclusive and limited product ranges alongside social-media-influencer-driven marketing campaigns during summer festivals across the globe.

Already, it has strengthened its own product ranges, shortened lead times and reviewed how product is presented across key summer trends including neon, safari and utility, and is already seeing improvements.

Customer focus

Beighton admits Asos didn’t quite “look and feel as good as we normally do in front of customers, and customers move very, very quickly”.

Reflecting on the past six months, Asos’ boss can now see how important “creative presentation, customer conversations, creating engaging content, how to style, how to wear and basically assisting with the customer engagement” are in driving the business forward.

“If I could go back six months, they would be the actions I’d be looking at rather than restoring the profitability and growth dynamics,” he explains.

Alongside poor own-brand sales, the first quarter also saw the added blow of poor Black Friday sales.

With competition from other big online players like Boohoo as well as bricks-and-mortar stores which discounted strongly, Beighton admits Asos’ seasonal offerings didn’t catch its customers’ eye as well as he’d hoped.

“Our 20% off everything didn’t quite look as compelling as what was on offer elsewhere,” he says.

“The reason why other people were going deeper on promotions and discounts is up to them, but with the benefit of hindsight we might have done a few things differently.”

Looking forward

Asos has addressed what went wrong and is “confident of an improved performance in the second half” with no change in profit guidance for the year.

Investors were pleased with that, and its forensic analysis of its issues, and the share price ticked up 8% as a result.

After coming out the other side of its heavy investment period bruised, Asos will now lower its capex for the next financial year to £150m and can pivot its attention back to doing what it does best – providing 20-somethings with the latest fashion.

While Beighton was quick to emphasise that he did not regret the investments made, it is clear that the etailer was unable to maintain focus when balancing its future needs and present performance. Its central problem was not around capex but around direction.

For now, it seems Asos now has its eye firmly back on the neon, animal-printed prize. But investors will not forgive this blip until the business proves that it can both plan for the future and protect the present.

Analysis: How did Asos get it so wrong?