Just like the speed with which clothes can be done up and worn, then discarded, the shares of ASOS (LON:ASC) gyrate in price, spurred by the dealings of Mike Ashley.
I can remember twenty years ago when a little quoted company called AsSeenonScreen Holdings tried desperately to raise a chunk of money to finance the purchase for stock for its new online mail-order business.
Its broker, Seymour Pierce, refused to help to fund it in the summer of 2003 – the sum required was just £350,000.
It was not until late August that year that a ‘penny share’ broker, Hoodless Brennan, marched forward and purchased 3m new shares from the company, which raised the funds required.
The fresh money was rapidly spent by the company to fill up its online shelves, enabling it to cope with the anticipated flow of business for the following Christmas period.
At around the same time I identified the group as a ‘tiddler’ to follow.
The company specialised in copying clothing worn by television and film stars and then selling them as quickly and as cheaply as possible, as it built up its trade.
It also had a subsidiary, Entertainment Marketing, which effectively ‘plugged’ products on television shows, like a bottle of beer on the counter of The Rovers Return in Coronation Street.
The more time it was shown in ‘placement’ added to the value paid. Similarly, too for an insurance company logo being visible on footballer’s shirts, both seen on screen and in the press.
There is a real science to valuing the exposure.
However, the real dynamo of the later renamed ASOS group was the online retail side.
The 2003 sales came in very well and the shares were just 5.75p each in January 2004.
That year, they trebled, then doubled again and so much more - such that by the end of 2004 they hit 82p, having multiplied by some 1426% inside the year.
In 2004, ASOS began introducing its products into the US and EU through affiliate networks (third-party websites which promoted ASOS products in exchange for a commission on products sold).
During 2010, language-specific websites were launched to support the group’s increasingly international presence.
By 2015, international retail sales to the EU, the US and the Rest of the World regions made up over half of total sales.
Despite various mishaps along the way, like warehouse fires, the rest of the story carried on impressively until 2018, by which time the shares peaked at over £77 each.
The business today
As a destination for fashion-loving 20-somethings, ASOS now operates as an online fashion retailer worldwide offering womenswear and menswear products.
Through its app and mobile/desktop web experience, available in ten languages and in over 200 markets, ASOS customers can shop a curated edit of over 70,000 products, sourced from nearly 900 global and local partner brands alongside a mix of fashion-led own-brand labels - ASOS Design, ASOS Edition, ASOS 4505, Collusion, Reclaimed Vintage, Topshop, Topman, Miss Selfridge and HIIT.
The group aims to give all of its customers a truly frictionless experience, with an ever-greater number of different payment methods and hundreds of local delivery and return options, including Next-Day Delivery and Same-Day Delivery, dispatched from state-of-the-art fulfilment centres in the UK, the US and Germany.
During the pandemic, the group saw a jump in revenue, from £2.7bn in 2019 to £3.3bn in 2020 and £3.9bn in 2021 and 2022.
However, after years of significant growth in its sales, the group is now getting into trouble on quite a few fronts.
But now the group is under pressure
To strengthen its balance sheet and shake up its buying and merchandising, the group recently raised £75m to support its turnaround plan, by way of a share placing of 17.9m shares at 418.1p each.
It also entered into a £200m senior term loan and a £75m revolving facility with specialist lender Bantry Bay Capital, with a term through to April 2026.
Early last month the group declared losses of more than £290m for the six months to end February, due to costs from restructuring efforts and being hit by 8% lower sales as customer spending came under pressure.
At the time CEO Jose Antonio Ramos Calamonte stated that:
“While some of these changes have impacted short-term sales growth, there are many causes for optimism as we progress through the second half of the year.
We are improving our gross margin run rate in the face of significant headwinds, are starting to see the benefits of a repositioned stock profile and are taking action to reduce the proportion of our sales which are not profitable.
Initiatives are in place to drive a further c.£200m of benefit in the second half and I am very confident of our return to sustainable profit and cash generation in the second half of the year and beyond.”
Russ Mould, investment director AJ Bell recently commented that:
“The fast fashion online retailer hopes this can create a solid base for the company’s recovery.
However, with the company paying high rates of interest on its newly agreed debt, much of the money raised from shareholders will almost immediately be going out the door on servicing its borrowings.
The danger is Asos hasn’t raised enough this time round, either through choice or necessity, and it will have to dig out the begging bowl again before too long.”
Soon to be under attack?
It is becoming apparent that last December Trendyol, a Turkish online retail group backed by the Chinese AliBaba group, made an offer worth over 1000p per share, when they were trading at half that price.
Despite talks with the company and Anders Holch Povlsen, the biggest shareholder, the £1bn approach to the group gained a negative response and resulted in Trendyol walking away.
Subsequently, the shares peaked at 982p in early February this year.
They waivered around the 750p price level, before easing back to 635p just before the interim results were announced in the second week of May.
Realisation that not all was as well as hoped in the ASOS camp, the shares were slashed back to 392p a week later.
In the last month they have fallen to as low as 325p, not helped by the news that Allianz Trade, a leading credit insurer had withdrawn cover to ASOS suppliers, citing the group’s finances and the economic conditions.
Another insurer, Atradius, also reduced cover – that is certainly not a good signal to give to the market.
Adding further to the woes – the group has now been dropped from the FTSE250 Index, which in turn loses any attractions for a host of fund management groups, in fact possibly turning them into sellers of stock.
It is noted that GLG Partners, Squarepoint Ops and World Quant have all been building up ‘short positions’ in the last week.
In comes Big Mike
And then along comes Mike Ashley and his Frasers Group.
He has more than doubled his share stake in the company, from just 5% a few months ago.
After adding another 2.5% of equity last week alone, Ashley now controls almost 10% of the equity.
Povlsen, who is a Danish billionaire worth around £6bn, holds some 26%, while the California-based hedge fund Camelot Capital Partners, managed by Will Barker, owns around 11% of the group.
The big question now is where is Ashley going?
Will he take even more stock out of the market, while the Management is fighting other group pressures?
It is said that he has previously made his own approaches to Povlsen and the group too, but he was spurned.
We know of old that he does not give up easily, often taking out big chunks of ailing group’s equity.
But is ASOS ailing?
Heeding the words of CEO Calamonte, it would be reasonable to expect a return to profits fairly soon.
So that could mean that the recent purchases by Ashley may prove to be excellent price averaging.
If the £415m capitalised company can get through its current ‘supplier/insurance’ crisis and stride onwards with its reorganisation, then the shares at 328p could prove to be the online retail bargain of the year.
If not, then a predator may well spring up with an appealing offer and take everyone out of their positions.
We shall just have to wait and see.
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