Invest-ability daily 11/10/21: Fashion Victim

The Asos rollercoaster continues – should shareholders follow the chief executive out of the door?

“Out with the old, in with the new” seems to be the order of the day at Asos, where news of a major profit downgrade was accompanied by the immediate departure of its chief executive, Nick Beighton, after six years in the role and 12 at the retailer. The shares fell 15 per cent on the news that while the company has, like many e-commerce businesses, experienced robust growth throughout the pandemic, it said that next year’s profits would be substantially below earlier expectations of £186m at between £110 and £140m. Many investors have decided that “out with the old” is the best thing they can do with Asos’s shares right now.

As it happens, “out with the old, in with the new” is a great way to describe Asos’s business model and, indeed, that of the entire fast fashion industry. While anecdotally I’ve heard that Asos is at the higher quality end of this market, it’s still in the business of encouraging shoppers to churn their wardrobes in order to deliver the growth expectations the market has come to expect of online retailers. If you’ve ever been to a City post office in the morning, you’ll know what this entails – mostly young women with parcels and parcels of unwanted items to be returned, for free, to Asos. And within Asos, it means a fiendishly complex supply chain with very short lead times on stock.

That may have left it very exposed to this autumn’s supply chain crunch, but in the past that supply chain flexibility has been a source of competitive advantage which has seen it steal share from slow-moving high street fashion retailers around the world. During the pandemic, for example, it meant the company could swiftly shift its focus from ‘going out’ to ‘staying in’ clothes’.  Combine that supply chain expertise with brilliant marketing – think Instagram and influencers – and a laser-focus on its core demographic, and the business has indeed grown rapidly and delivered very nicely for those that have bought its shares at the right time.

Indeed, even if you didn’t get in early there have been several opportunities to buy quite major snapbacks in the Asos story: they hit £70, only to grind lower to £18 throughout 2014, and then the same again in 2018, when the share briefly touched £77 a share before sliding back to just over £20 long before the pandemic struck. Could today’s fall to £25, which marks a more than 50 per retracement from its post-pandemic high, be another?

Indeed, Asos doesn’t look like a substantially worse business than the one that back 3 years ago was worth three times as much – if anything, it’s a much better one having invested heavily in its infrastructure and, most recently, acquired the Top Shop brand from the failed Arcadia Group, another favourite among its demographic. The profit boost it received from young customers returning fewer clothes during the pandemic may have receded, but the temporary nature of some pandemic trends should hardly come as a surprise. And while returns on capital and profit margins may have moderated, this is still a company investing very effectively to achieve growth.

Being a long-term holder of Asos’s shares has definitely not been a ride for the faint-hearted, and buying now might not be for the faint-hearted either given that it’s quite possible that supply chain troubles may rumble on longer than expected. And there are lingering doubts over the long-term sustainability of fast fashion as an industry which can’t be ignored. But Asos is a great business that has worked hard to cement its place at the centre of its 26.4m strong audience’s shopping habits, and that won’t change just because house-weary teenagers fancy a trip to the shops after a long and boring lockdown.

What has changed is that it now costs a lot less to buy into the business than it did just six months ago – even after the downgrade its forecast PE stands in the mid-twenties, far below the huge multiples seen when investors had more faith in the Asos growth story. And while Asos’s latest sell-off may not yet have left the shares in true Jumble Sale territory, they are getting cheap enough again that the fickle market, often prone to over-excitement on both good and bad news, may soon decide that they’re fashionable once more.

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