- Management warns of a second consecutive fall in sales in fiscal 2024
- Fast-fashion retailer’s shares have done nothing but fall since promotion to the FTSE 250 in June 2022
- Profit warnings and balance sheet woes reaffirm that fundamentals matter more than cosmetic issues such as index inclusion, over the long term
“Over time, one of, or a combination of, four things will do to erode a company’s competitive position and leave it struggling: competition, changes in customer tastes (or technological development and obsolescence), debt or regulation. In the case of ASOS, it looks like new rivals and change in habits are doing the damage, with a helping hand from its borrowings,” says AJ Bell investment director Russ Mould. “Chief executive José Antonio Ramos Calamonte is doing his best in his second year in the job, but the need to dish out another profit warning shows there is still much work to be done if the company is to re-establish itself as a force in its industry or a desirable stock portfolio selection.
“The long-term share price chart does not inspire confidence and Mr Calamonte and team have a big job on their hands as they seek to turnaround ASOS, after prior management teams allowed costs, inventories and debt to rise as they chased sales. Input cost inflation and fractured supply chains are putting the pressure on fast-fashion’s margins, consumers are choosing their purchases more carefully as purses and wallets are squeezed and nimbler rivals like Shein are proving to be formidable competition as they offer an alternative product and price range.
Source: Refinitiv data
“Unfortunately, the shares trade at their lowest level since autumn 2009 for a reason and it is now the job of Mr Calamonte and his colleagues to improve operational and financial performance. The plan to reduce inventory, improve stock turn and reduce discounting to improve margins, profits and cash flow all makes perfect sense, but the problems are clearly deep-rooted and the economic and competitive backdrop is equally unhelpful, given how management now expects sales to fall again in the twelve months to August 2024.
Source: Company accounts, Marketscreener, mid-point of management guidance range for 2024E sales
“Worse, the implication of the EBITDA margin forecasts given for fiscal 2025 is that the firm could be struggling to make a pre-tax profit even then.
Source: Company accounts. Fiscal year to August.
“The process of clearing out unwanted stock, improving warehouse efficiency and fending off Shein and others is going to be a laborious one, and ASOS’s debt position crimps its ability to invest and rise to the competitive challenge. It is to be hoped that inventory reduction will bring in cash and help to reduce borrowing and Mr Calamonte seems confident this will be in evidence in fiscal 2024, after the first signs of progress in the year just ended when inventory days began to normalise.
Source: Company accounts. Fiscal year to August.
“However, the net finance charge of £53 million is a significant sum for a firm that is in loss, and it would be no surprise were ASOS to seek out other sources of funding. Management is maintaining a dignified silence about the rumours of a sale of the Topshop brand acquired from Sir Philip Green’s fallen Arcadia empire for £330 million in 2021, but such a move would not shock given how that transaction is one reason ASOS now finds itself cabined, cribbed and confined by debt.
Source: Company accounts. Fiscal year to August.
“ASOS’s fall from grace is a warning that fundamentals such as profits, cash flow and debt matter so much more than cosmetic issues such as index inclusion.
“The excitement that surrounded ASOS’s move to the Main Market from AIM in February 2022, and subsequent promotion to the FTSE 250 that June, feels like a lifetime ago. The shares have done nothing but fall ever since, despite all of the talk that promotion and index inclusion would spark a wave of buying from passive funds and index trackers. No doubt the trackers bought, but someone had to sell to them and perhaps, on this occasion, the actively managed money was smarter as a willing seller.”
Source: Refinitiv data
