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Why Asos’ Earnings Growth Hinges on Customer Returns

A new purchasing habit has emerged as the coronavirus pandemic continues to keep people indoors: Shoppers are returning fewer items — a behavior that appears to have boosted Asos’ sales and profit forecast for the full year.

The London-based retailer’s 2020 outlook came in significantly ahead of market expectations: For the 12-month period, it expects revenue to be up between 17% and 19%, while income before tax is predicted to rise more than 33% to the range of 130 million pounds to 150 million pounds, or $169.30 million to $195.35 million at current exchange rate.

Consensus bets put sales at a 13% improvement and profits before tax to amount to between 65 million pounds and 70 million pounds, or $84.64 million to $91.15 million. Asos attributed its higher forecast to “stronger-than-anticipated underlying demand” and a fewer number of products being returned by customers.

“We had expected to see underlying returns normalize once lockdown measures eased and customers were both able to ship returns and felt more comfortable doing so,” the company wrote in a statement. “However, in recent weeks, we have gained better visibility on this pattern in customer behavior as we have progressed through the returns cycle, and it has become evident that returns are not increasing at the rate we originally anticipated.”

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The fast-fashion e-tailer said it has seen a “significant and sustained reduction” in the rate of returns since April — partly due to consumer demand for so-called “lockdown categories,” including activewear as well as skincare products. It also recorded a shift to more intentional or “deliberate” purchasing across all product categories.

However, Asos sounded caution on the long-term viability of these purchasing habits. (The company previously suggested that it had sufficient liquidity within its existing facility worth just upwards of $430 million.)

“Looking forward, the consumer and economic outlook remains uncertain, and it is unclear how long the current favorable shopping behavior will persist,” it said. “The second half has been a period of tremendous change for ASOS; we have made real progress and shown resilience through the period and are exiting the year in a strong position.”

Asos added, “We have a robust balance sheet, with a differentiated product offer and global infrastructure to leverage. Against this backdrop we have increased confidence that Asos will continue to progress as one of the few truly global leaders in fashion retail.”

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