Asos: fast fashion groups quickly go out of style

Green is out and red is for online fast fashion followers as a suitable color to track falling stock prices on trading screens.

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

Competition remains fierce. New entrants such as Chinese disruptor Shein and second-hand clothing seller Vinted are putting pressure on incumbents.

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

Asos showed few signs of improvement in half-year results this week; the decline in UK sales accelerated to 15% year-on-year. The company made an operating loss of 272 million euros. Shareholders were scared. Shares fell on the day to trade at 10x forecast earnings for 2024.

Investors should view online fast fashion retailers in the same light as the clothes they sell: fun, fragile and fleeting. The big banks have franchises that can last for centuries. Physical clothing retailers generally have shorter shelf lives. Marks and Spencer was established in 1884 but its clothing business has been in decline since the 1990s.

Lifecycles are even tighter in online-only fast fashion. This is because the barriers to entry are so low. Businesses do not need special intellectual property. Only a modest physical infrastructure is required. Entrepreneurs make the clothes.

Consumers are not loyal to the brand. They want quick fulfillment of their wishes at an unbeatable cost.

New chief executive Jos Calamonte hopes to rebuild Asos into a smaller, leaner and more profitable business.

A rule of thumb in retail is to maintain gross margins. This means passing on any increased supply costs to customers. But it is difficult to do under the pressure of competition. Asoss’ gross margins fell from 50% in 2019 to 40% in the year to February, according to data from S&P Capital IQ.

Asos hopes to repair the damage by better controlling its supply chain. He wrote some inventory and plans to carry less stock. The broader turnaround plan is expected to add some 300 million in annual profits.

Calamonte is aiming to squeeze out some of Asoss’ clientele that are causing more trouble than it’s worth. They mainly buy discounted clothes, returning a large percentage of them. The purge should have the effect of reducing sales without a serious impact on margins.

Most metrics such as number of orders, active customers, and site visits are trending in the wrong direction. Shareholders fear being exploited for more money.

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

Asos shareholders have had a good run during its growth years. But he’s now a troubled starter rather than a brave troublemaker. Risking capital on a restart would be unwise, given the fickleness of the fast fashion industry.

Buffett / capital allocation: Berkshire money earns a lot of interest

The US Securities and Exchange Commission wants to require US-listed companies to explain their share buyback philosophies to shareholders. Multi-billionaire investor Warren Buffett did so at Berkshire Hathaways’ annual meeting of shareholders in Omaha last week.

He and partner Charlie Munger answered questions as usual about Berkshires capital allocation choices. However, for the first time in more than a quarter century, base interest rates in the United States have climbed above 5%. Despite the usual questions about what to do with Berkshire’s cash balance, which now stands at $131 billion, the opportunity cost of deploying that money was ultimately significant.

In particular, Buffett said he thought Berkshire shares were cheap. This might confuse the average investor given that each is worth close to $500,000, which equates to a market capitalization of over $700 billion. It is also a 40% premium to Berkshire’s book value, also known as equity book value. Nonetheless, in the first quarter, Berkshire repurchased $4.4 billion of its stock.

Buffett has said he would like to buy a $50 billion to $100 billion company. But state-owned company processes are often time-consuming and overly price-competitive. It prefers opportunistic bailout funding or investments in the $5-20 billion range, as with Occidental Petroleum in 2019.

Its vaunted Berkshires insurance segment float now totals $165 billion. This cash from premiums paid is essentially free to invest and is stable against bank deposits, a relevant comparison this year. Meanwhile, Berkshire remains so well capitalized that it is expected to absorb all P&C claims from its customers.

Note that Berkshire’s stake in Apple, which owns about 6% of the company, is worth $155 billion. The iPhone maker recently announced a $90 billion buyout, which stands in contrast to Buffett’s almost religious zeal to keep profits and cash flow to invest later.

Instead, its investors still receive no dividends and just a modest buyout. They have to accept Berkshire passively earning 5% risk free on their money.

Simplistically, this reflects how much of a multiple is needed to strike a deal. Take the inverse of that 5% and 20 times earnings is the approximate purchase price to beat those cash returns. Above that multiple and the deal isn’t worth it. The Berkshires’ big game hunt may continue for some time.

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