ASOS plc

A turnaround special-situation play on a global online retailer (LSE:ASC.L)

ASOS monthly chart since IPO. Annotations mine.

ASOS was founded in 2000 and has since established itself as the clear leader in UK online fashion for young adults. From the IPO in 2001, up until the peaks of 2014 and 2018 — I bet ASOS minted a few millionaires as shares increased > 300 fold.

Let’s have a look at where ASOS is now, the problems plaguing it and how management plans to turn the tide.

…But first let’s start with some context.

Historical Context

ASOS was founded in 2000 with seed money and IPO’d 1 year later raising 12 million pounds in equity financing. When Nick Beighton joined as CFO in 2009, the company had 178 people and 200 mln GBP in sales. The company enjoyed a relatively easy ride until 2014 — when shares were hit by consecutive profit warnings….👇

“ASOS has been impacted by a number of different factors, but this warning in relation to overseas trading and margin mix/promotions is considerably worse than the factors that preceded it, which included higher China losses and the effect of disruption and double running from the next leg of warehousing/infrastructure development. Today's news will come as a shock to many and is also worse than we had feared.”

Matthew McEachran, retail analyst at Singer

The source of their troubles was a botched entry into China which later forced them to exit local operations completely. Chinese shoppers can still find products via the ASOS global platform, but the local website was discontinued.

After exiting China and promoting Nick Beighton to CEO (after founder Nick Robertson left the company), share prices recovered briefly making new all time highs.

Success was short-lived as another bout of profit warnings caused the share price to crash, again 🙄

Operating Margin Over Time

MARGIN RESET: EBIT margins took a dive in 2014 and stayed there..

Looking through to the performance at the time, this was the reason for the margin reset 👇

You can see how distribution & administrative expenses expanded to support increased sales, and gross profit margins faded by ~1.6%, further squeezing the bottom line. EBIT margins in this kind of business are razor thin already, squeezing them, even momentarily, doesn’t help investor confidence.

Revenues expanded by 27% while profits shrunk by 11% year to year.

But even though the company exited China completely in 2016, margins did not recover to previous levels. The ongoing required investment in technology and logistics, while all other geographies were not performing as well as the UK - made sure of it.

…Where is ASOS now? 🙁