Comment: taking stock of the valuation of Asos
It must have been around 2008 when I met with Asos co-founder & CEO Nick Robertson who insisted we sit outside a café near the company’s head office in North London because he wanted to smoke one of his cigarillos.
We’d joked about how he never seemed to be in the office and he always struck me as one of the most laid-back leaders. But on this occasion he expressed his dismay with the City’s misunderstanding of his business and on the back of a paper napkin he detailed how the investment community were failing to value it correctly.
The shares stood at around 250p at the time and his mispricing theory proved to be absolutely correct and he was to enjoy their rapid rise up to almost 7,000p at which point over 20% of the UK population had placed an order with the company. After he stepped back in 2015 Asos continued to power on to hit annual sales of £2.7 billion in 2019 with goods being shipped to almost 200 countries.
From this point on its fortunes changed. Heavy discounting pre-Covid-19 battered profits but things picked up during the pandemic for obvious reasons. This proved to be a false dawn and online sales for all companies have continued to fall month-on-month since markets fully opened up again and people returned to physical stores.
This had left Asos with a mountain of stock that it was unable to shift and since it operates a fast fashion model the short shelf life on much of this inventory meant it had soured rather quickly and shoppers simply turned their noses up at it. It’s therefore been a very different challenge that current CEO José Antonio Ramos Calamonte faces compared with his predecessors the two Nicks (Robertson and his successor Nick Beighton).
The recent trading statement from Asos – for the three months to May 31 – is thick with references to the CEOs ‘Driving Change’ strategy. At the heart of this is a process the company calls the right-sizing of its stock. This involves offloading the stock it has for cash and buying less stock. No doubt the recently introduced partnership with Secret Sales will be helping sell some of this non-full-price inventory. With less excess stock sitting in its warehouses the second part of its strategy kicks-in – selling at a higher margin through the reduced need to run promotions.
While these actions have helped Asos deliver a quarterly profit, it has also – not surprisingly – pushed down sales volumes. The company reported a 14% fall in sales to £858.9 million. Encapsulating exactly where the company stands Calamonte stated: “We are delivering on our plan to turn the business around: to right-size our stock; the generate cash; to reduce our net debt; and to structurally improve our profitability.”
What he did not elaborate on are the next steps he plans to take beyond this right-sizing manoeuvre. The trading statement merely said: “It is too early for us to outline the growth strategy for Asos.” This is fair enough because the City and the press always want more. But there is an element of concern here that there isn’t really an obvious path to the levels of growth that Asos has been accustomed to enjoying.
There is a strong argument that those glory days are well and truly over for Asos and others in the pure-play fast fashion camp. Aside from Asos’ own stock issues, the model is certainly under pressure more broadly. The cost of acquiring and serving customers has eaten into margins, competition has increased (there is always some newcomer that is faster and cheaper), physical retail is enjoying a resurgence, and there is also the question of whether younger generations have tired of the disposable nature of much of the fashion industry.
Despite this tough backdrop Asos remains an attractive operation as evidenced by the recent stake-building by Frasers Group, which has taken its stake to over 10%, and the reports of a £1 billion bid for the company in December from Turkey-based retailer Trendyol. This compares with a current market valuation of less than half this amount. It remains to be seen whether there is an argument that it is currently under-priced and that the rationale for this could be explained on the back of a napkin.
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