Online-only clothing retailer Asos has ordained about £700m of capital in the past five years on the theory that a pot of gold awaits the company that can grace “the world’s leading fashion destination for twentysomethings.” As the investment splurge reaches its intended peak, where do profits remain in effect? Lower than the level in 2014, which is extraordinary.
Thursday’s latest warning related to troubles with goods. The software in the “Eurohub” in Berlin isn’t working properly; and third-party brands are struggling, apparently, with the US customs paperwork needed to get their clothes into Asos’s new facility in Atlanta. Cue another heavy fall in a share price that has go into a nosedived from £75 to £21.07 in 18 months.
Optimists will believe the pot-of-gold thesis is intact. Didn’t Amazon display that true ambition lies in a long-term focus on building the infrastructure and not fretting about the odd hiccup? And, since Asos should calm clock up revenues of £2.7bn this year, it’s clearly hitting its intended audience, right?
Such arguments turn a deaf ear to two problems, though. First, Asos is operating in an online clothing world that suddenly looks crowded. In qualifications of stock market value, Boohoo is bigger these days. Then there’s Zalando, out of Germany. And Next, which rearranges more than half its turnover online already (at decent profit margins), is moving into the game of stock third-party labels.
The other problem is Asos’ hopeless forecasting record. Back in 2014, the company said profit margins liking have to be lowered from 7%-8% to 4%-ish for a while. Then 4% become 2% last December. Now, with profits set to drop dead to £30m-£35m this year, margins are closer to 1%.
Chief executive Nick Beighton, whistling cheerfully as ever, avers “corrective actions’’ will quickly fix the “operational challenges” with the warehouses. As this stage, though, Asos has happen to a mystery stock. The sales line is healthy, but the eventual profits from the enormous spending programme are anybody’s feel.
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 coterie 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 labour 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 in a jiffy you count the still-substantial borrowings of £1.7bn. But, oh dear, the buyer comes from private equity, a world not noted for economic sobriety. Does another exercise in balance-sheet bravado await?
TDR Capital, supposedly, is the cuddlier type of private fair play outfit in the sense that prefers to buy and invest in businesses rather than buy, leverage and flip. There’s some validation for that claim, thankfully. TDR established Stonegate, the company behind Slug & Lettuce, as long ago as 2010 and has doubled its native 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 inflation, 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 evaluation. Most UK pub chains are valued at about eight or nine times operating earnings, but Ei will be changing hands at 11.4 adjusts. 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 figure.
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 into 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 distance of accidents with debt. The buyer is not leaving much room for error or recession.
Water nationalisation has changed the spew of debate
“These are seriously stretching goals for the sector,” said Rachel Fletcher, chief executive of water regulator Ofwat, bring to light the latest five-year review. And, by Ofwat’s much-criticised standards, perhaps she’s right. Ignoring the effects of inflation, bills require fall by an average of £50 per household from April next year, which does genuinely count as a severer settlement than in the past.
Do not, though, expect the Ofwat stance to lower the political temperature. The mere threat of nationalisation beneath Labour has changed the debate. Even the Tories know further corporate dividend bonanzas would land on their doorstep. The big-picture five-year view for water is political interference of some form.