Asos: fast fashion groups go out of style quickly

Green is off-limits and red is for online fast-fashioners – as the right color to follow falling stock prices on trading screens.

The industry thrived at the height of the pandemic, which created a large customer base. Shoppers are now buying fewer clothes online. They also return more of their purchases, increasing costs for retailers.

Competition remains fierce. New players such as Chinese distributor Shein and second-hand clothing retailer Vinted are putting pressure on the incumbents.

These include Asos from the UK, a pioneer in the industry. Its shares have lost more than 90 percent of their value since their March 2021 high. UK-based Boohoo and Germany’s Zalando have also fallen.

Lex graphic of Asos sales (£bn) and gross margin (%)Fast fashion flops - stock prices (rebase)

Asos has shown little sign of improving its half-year results this week; UK sales declines accelerated to 15 percent year-on-year. The company reported an operating loss of £272m. The shareholders were horrified. The stock fell overnight to trade 10x its projected 2024 gains.

Investors should view online fast-wear retailers in the same light as the clothes they sell: fun, thin, and ephemeral. Big banks have franchises that can last for several centuries. Physical clothing retailers typically have a shorter shelf life. Marks and Spencer was founded in 1884, but its clothing business has been in decline since the 1990s.

Life cycles are even shorter with online-only fast fashion mode. This is because the barriers to entry are so low. Companies do not need any special intellectual property. Only modest physical infrastructure is required. The contractors make the clothes.

Consumers have little brand loyalty. They want a quick fulfillment of their wishes at the lowest cost.

Newish CEO José Calamonte hopes to rebuild Asos as a smaller, leaner and more profitable business.

The golden rule in retail is to maintain gross margin. This means that any increases in delivery costs are passed on to customers. But it is difficult to do so under the pressure of competition. Asos’ gross margins fell from 50 percent in 2019 to 40 percent in the year ending February, according to S&P Capital IQ data.

Asos hopes to repair the damage by better controlling its supply chain. He has written off some stocks and plans to reduce stocks. The wider payback scheme is expected to deliver around £300m in annual benefits.

Calamonte aims to squeeze out some of the Asos customer base who are more trouble than they’re worth. They mainly buy discounted clothes, of which they return a large percentage. The effect of the purge should be a reduction in sales without a serious impact on margins.

Most metrics like order numbers, active customers, and website visits are going in the wrong direction. Shareholders fear they could be used to get more cash.

Funds are tight. Asos pulled out £250m in funding, leaving around £400m in cash and facilities in February. Cash inflows in the second half should result in a £100m cash burn for the full year.

Asos shareholders had a great run during the growth years. But now he’s more of a restless official than a daring demolitionist. Risking restart capital would be unwise given the volatility of the fast fashion industry.

Buffett/capital allocation: Berkshire cash is in high demand

The U.S. Securities and Exchange Commission wants to require U.S. listed companies to explain their share buyback philosophy to shareholders. Multibillion-dollar investor Warren Buffett did so at Berkshire Hathaway’s annual shareholder meeting in Omaha last week.

He and partner Charlie Munger answered questions about Berkshire’s capital allocation choices as usual. However, for the first time in more than a quarter of a century, base interest rates in the US have risen to more than 5 percent. Despite the usual questions about what to do with Berkshire’s cash balance – currently up to $131 billion – the opportunity cost of using that cash was finally significant.

Buffett in particular said he believed Berkshire stock was cheap. This may confuse the average investor, given that each is worth nearly $500,000, which corresponds to a market capitalization of over $700 billion. It’s also a 40 percent premium over Berkshire’s book value, also known as equity book value. Nevertheless, in the first quarter, Berkshire repurchased its shares for $4.4 billion.

Buffett said he would like to buy a business worth between $50 billion and $100 billion. But public company processes are often time-consuming and overly competitively priced. He favors opportunistic bailout financing or investments in the $5 billion to $20 billion range, such as Occidental Petroleum in 2019.

His much-vaunted Berkshire insurance float is now $165 billion. This premium cash is basically free to invest and is stable against bank deposits, which is an apt comparison this year. Meanwhile, Berkshire remains so well capitalized that it should take all property and casualty claims from its clients.

It is worth noting that Berkshire’s stake in Apple, accounting for about 6 percent of the company’s ownership, is worth $155 billion. The iPhone maker recently announced a $90 billion buyout, which contrasts with Buffett’s almost religious zeal to keep profits and cash flow for later investment.

Instead, its investors still receive no dividend, only a modest buyout. They must accept Berkshire passively earning 5 percent no risk on their cash.

Simply put, it reflects how low the multiplier is needed to go through the fundraiser to conclude the deal. Let’s take the inverse of that 5 percent and 20 times earnings, which is the approximate break-even purchase price to beat those cash returns. Above this multiple, the deal is not worth it. Big game hunting in Berkshire may continue for some time yet.

Lex is FT’s concise daily investment column. Expert authors in four of the world’s financial centers provide timely, thoughtful insights on capital trends and large enterprises. Click to explore

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