The fashion industry is fickle and so are Asos investors. A whiff of trouble and they are quick to turn their backs on the fast fashion darling. So a warning that ever-shifting government guidance on the total lifting of Covid-19 restrictions had weakened demand for “going out wear” in the past three weeks, and would also bring the growth rate back down to earth during the fourth quarter, meant that Asos was given short shrift.
But that wasn’t the only reason investors wiped 15 per cent off the group’s market value on the morning of an update for the four months to the end of June. Disruption to global supply chains in the pandemic has led to increased freight costs and delivery delays. The cost of sending a container from China to the UK has risen tenfold since the start of 2019, says Nick Beighton, chief executive of Asos. For a group that makes more than half its sales overseas, that has particular margin-sapping potential.
Asos shares have become synonymous with high growth expectations since it listed on Aim in 2001. However, investors have been gradually casting a more critical eye over the group’s potential since three profit warnings were issued in an eight-month period between 2018 and 2019, when the bungled overhaul of warehouses in the United States and Europe and a high level of discounting hamstrung sales.
With a more reasonable enterprise value of 1.2 times forecast sales, and 15 times earnings before interest, tax, depreciation and amortisation (ebitda), the stock trades at a discount to the averages achieved since 2013, when both valuation multiples hit a record high. That also leaves the shares with a lower valuation than its peers, Boohoo and Zalando.
But the magnitude of the sell-off that met third-quarter trading figures reeks of short-termism. It also prompts the broader question of just how harshly lockdown winners will fare against tougher comparables later this year and into next.
Of course, there is an element of uncertainty over exactly when distribution capacity will recover and alleviate cost pressures. Complete clarity in rules that would allow festivals, mass events and travel to restart uninterrupted is also likely to evade purchasers of the more expensive occasion wear for a while yet. But there has been a pick-up in smarter clobber in recent weeks as rules are loosened, a trend that seems almost certain to continue.
Sales growth, which benefited in lockdown from rivals’ shops being closed and a lower level of clothing returns, was naturally going to slow from the 30 per cent in the four months to June. But the growth rate reported before Covid-19 — 20 per cent for the six months to the end of February last year — is not to be sniffed at. Work on reducing non-strategic operating costs has also fed through to adjusted ebitda margins.
The big opportunity is grabbing more market share in Europe and the US. While Asos’s slice of the UK market had increased to 3.5 per cent by the end of last year, according to the analytics firm GlobalData, in the US it was 0.1 per cent. The acquisition of the Topshop brands, which had a stronger US presence, and the tie-up with Nordstrom, the US department store chain, have the potential to accelerate gains across the Atlantic.
In a hint of potentially more deals of the Nordstrom ilk to come, Beighton says that the focus is on building a model that can be replicated elsewhere. “The major prize is eyeballs,” he says. A net cash pile, which stood at £92 million in February, together with the proceeds of a £500 million convertible bond launched in April, gives the group the firepower to invest in deals and infrastructure. In the past the shares probably needed to be taken down a peg or two but investors might have now gone too far.
Advice Buy
Why Shares’ valuation does not reflect sales potential from international expansion
Johnson Service Group
This company might not be a household name but its shares are a proxy for some of the UK’s largest pubs, restaurants and hotels.
As a provider of laundry services to hospitality groups including Premier Inn, Fullers and Marstons, as well as big events such as Wimbeldon, lockdown restrictions have dealt a heavy blow to revenue and last year these pushed it into a £32 million pre-tax loss.
So the lifting of curbs has been heavenly manna for the Alternative Investment Market constituent. Volumes for the hotel, restaurant and catering business had rebounded to 70 per cent of pre-Covid levels by the end of June, ahead of analysts’ expectations and up from only 30 per cent for the last two weeks of April.
But the runway to recovery is not completely clear. Amid a labour shortage competition for staff is leading to higher costs, combined with a volume shortfall that will knock margins in the coming months.
Confusion over July 19 guidelines for hospitality are not helpful either. Still, analysts at Numis are forecasting a return to pre-tax profit of £4.5 million this year and a jump to £44.9 million next year.
Unlike some of its clients in the leisure and hospitality industries, Johnson should be exiting the pandemic in relatively robust form. Raising a gross £85 million via a placing last year left the group, which already had leverage under control, with a meagre net debt position of £8.8 million at the end of June, which was also almost half of the figure Numis forecast.
It’s been helped by the revenue stream generated by its workwear rental and laundry business, which before to the pandemic accounted for just over a third of group revenue.
The workwear division naturally snapped back more quickly, reaching pre-pandemic volumes by October and 98 per cent by the end of last month.
However, with the shares trading at almost 18 times forecast earnings for next year, they have a valuation that is in the same ballpark as the two years before the pandemic struck.
Advice Hold
Why Potential for earnings recovery is priced into the shares
