Online-only clothing retailer Asos has invested about £700m of capital in the past five years on the theory that a pot of gold awaits the company that can become “the world’s leading fashion destination for twentysomethings.” As the investment splurge reaches its intended peak, where do profits stand? Lower than the level in 2014, which is extraordinary.
Thursday’s latest warning related to troubles with warehouses. The software in the “Eurohub” in Berlin isn’t working properly; and third-party brands are struggling, apparently, with the US customs paperwork required to get their clothes into Asos’s new facility in Atlanta. Cue another heavy fall in a share price that has slumped from £75 to £21.07 in 18 months.
Optimists will believe the pot-of-gold thesis is intact. Didn’t Amazon demonstrate that true ambition lies in a long-term focus on building the infrastructure and not fretting about the odd hiccup? And, since Asos should still clock up revenues of £2.7bn this year, it’s clearly hitting its intended audience, right?
Such arguments ignore two problems, though. First, Asos is operating in an online clothing world that suddenly looks crowded. In terms of stock market value, Boohoo is bigger these days. Then there’s Zalando, out of Germany. And Next, which makes more than half its turnover online already (at decent profit margins), is moving into the game of selling third-party labels.
The other problem is Asos’ hopeless forecasting record. Back in 2014, the company said profit margins would have to be lowered from 7%-8% to 4%-ish for a while. Then 4% become 2% last December. Now, with profits set to fall to £30m-£35m this year, margins are closer to 1%.
Chief executive Nick Beighton, whistling cheerfully as ever, says “corrective actions’’ will quickly fix the “operational challenges” with the warehouses. As this stage, though, Asos has become a mystery stock. The sales line is healthy, but the eventual profits from the enormous spending programme are anybody’s guess.
A high bar for the Slug & Lettuce owner
A 10-year hangover is severe, but so was Enterprise Inns’ debt binge in the bad old days. The party ended with recession and the banking crisis in 2008, and Ei, as the UK’s largest pub company now insists on calling itself, was obliged to sweat its way towards a healthier lifestyle. It’s had some success too: net debts have been reduced by £780m over the last five years.
Now here comes a takeover bid, valuing Ei at £3bn once you count the still-substantial borrowings of £1.7bn. But, oh dear, the buyer comes from private equity, a world not noted for financial sobriety. Does another exercise in balance-sheet bravado await?
TDR Capital, supposedly, is the cuddlier type of private equity outfit in the sense that prefers to buy and invest in businesses rather than buy, leverage and flip. There’s some evidence for that claim, thankfully. TDR established Stonegate, the company behind Slug & Lettuce, as long ago as 2010 and has doubled its original size through purchases while not stinting on organic investment.
Very good, but it would be hard to describe this purchase of Ei as low-risk. Stonegate, for all its expansion, has 772 outlets versus 4,000 properties in the Ei estate. This is a very big step up.
It is also happening at a high price. Most UK pub chains are valued at about eight or nine times operating earnings, but Ei will be changing hands at 11.4 times. That is why the target’s board said yes to a bid in cash: it’s hard to refuse an offer at a 38% premium to Wednesday’s share price.
As for financial leverage, it looks as if the combined outfit will start life at six times, as measured by net debt to top-line earnings. TDR could argue that’s roughly where Ei stands today, so nothing much is changing. OK, but six times still looks intoxicating in a sector with an unlovely record of accidents with debt. The buyer is not leaving much room for error or recession.
Water nationalisation has changed the flow of debate
“These are seriously stretching goals for the sector,” said Rachel Fletcher, chief executive of water regulator Ofwat, unveiling the latest five-year review. And, by Ofwat’s much-criticised standards, perhaps she’s right. Ignoring the effects of inflation, bills will fall by an average of £50 per household from April next year, which does genuinely count as a tougher settlement than in the past.
Do not, though, expect the Ofwat stance to lower the political temperature. The mere threat of nationalisation under Labour has changed the debate. Even the Tories know further corporate dividend bonanzas would land on their doorstep. The big-picture five-year outlook for water is political interference of some form.