Excessive Returns Are Cutting Into Asos’ Profits — Will Its New Policy Help or Hurt Its Bottom Line?

Like many fashion retailers that sell online, Asos has a returns problem.

Not that the company would necessarily classify it as such (offering a generous returns policy boosts customer satisfaction, after all) but handling reverse logistics and unwanted product is an expensive proposition for any business, and online return rates for clothing and accessories can be as high as 40 percent. (Zalando, Europe’s largest online fashion retailer and one of Asos’ key competitors, said in the fall that it sees half of its merchandise sent back, and blamed its third-quarter losses largely on problems processing these returns.)

On Wednesday, Asos reported results for the first half of its fiscal year — a moment watched closely by investors after the company’s disappointing holiday performance sparked a sell-off that sunk its share price by more than 40 percent. Sales were up 14 percent over the same period last year, and the company’s forecasts for the full year remained unchanged, which was enough to boost its stock value by more than 7 percent during U.K. trading hours.

Still, it was hardly all good news: Asos’ pretax profit fell by 87 percent, and its retail gross margin sank 60 basis points. The problems, it said, were due in part to logistics issues at its new U.S. distribution center, which was not prepared to handle the demand it saw in its first weeks in operation, as well as discounting and promotional activity during the first quarter.

“Asos is capable of a lot more,” said CEO Nick Beighton. “We have identified a number of things we can do better and are taking action accordingly. We are confident of an improved performance in the second half and are not changing our guidance for the year.”

One change it’s already made is to its returns policy: On Friday, the company sent out an email to customers saying that it will now offer returns up to 45 days for store credit (as before, returns within 28 days are eligible for refunds). It’s also implementing a returns “blacklist” for customers that are suspected of buying garments and returning them after wearing them or of buying and returning items in bulk. “We also need to make sure our returns remain sustainable for us and for the environment, so if we notice an unusual pattern, we might investigate and take action,” it said in the email. On its website, it explained that this could entail deactivating the offending account and all associated accounts.

Earlier this year, resource planning platform Brightpearl surveyed 200 U.K. retailers and found that more than a third said they’d seen an increase in excess returns in the past year. In response, almost half said they planned to blacklist serial offenders.

In its earnings report, Asos also gave some insight into its returns infrastructure, saying that it now has seven sites in five countries dedicated to processing returns, and is implementing a new system that will improve productivity at the existing sites by 10 percent and eliminate the need to add new facilities in the medium term.

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