My ASOS Thesis1 Oct 2023 08:48
I just wanted to explain my thesis re ASOS, Please ignore if not interested. But some of it may be helpful. I researched and then took a large position (for me) before the May qtr results. I put my hands up and say management is key for me and asset second. I really rate Jose and the team he has built up, the structure and particularly the collegite style. I also hope that the interim CFO stays permanently. Jose and the team have a back to basics plan and have stuck to it since October 2022. They have been open and transparent about what is needed. They simply need time and I think it will be 12 months, this time next year that ASOS will really begin to fly. I personally don,t buy the T/O scenario, not because there aren't suitors but due to the shareholding structure. It would require a really hefty premium 200%- 300% to get them to shift. The two recent Q & A's have really developed my understanding of Jose's thinking. quality of customer and profit ,which requires the short term pain of low margins to get rid of old stock and focus upon the Test and React model. Indeed I think it was the City AM article, I may be mistaken but one article, that called this a trail blazing approach and one that many companies will need to follow. In the half year results presentation, I think Jose was asked by analyst if he had growth strategy and he stated that the key was to return ASOS to profitibility and stabilise. The reduction by 30% of stock cannot be underestimated as it will allow ASOS to become leaner which is what the test and react model requires. I suspect that by the January update (4 months trading), we shall see the 40% target (pre Covid stock levels) achieved albeit at the short term expense of margins. What any company needs, what the employees need is to be motivated I believe Jose and the team are providing this. The management team are engaging and exude confidence and a plan that simply needs time. In the recent Q & A Jose mentioned return to growth on a number of occasions and said this would be spealt out on 25th at Full year presentation. This I believe will be a turning point for the company. Add to falling inflation the headwinds of input costs etc... are subsiding quite markedly giving margin breath. So for me I have penciled in a P1 to 4 2024 trading year profit target of circa £90m and FCF of circa £200m ( including the carry forward of the £60m from this year). The one enormous fly in all this is the breath and level of shorts. They are clever, unscrupulous people and that is a worry to me. I cannot figure it out. I thought something would have been leaked prior to the last qtr results but no. To be at 7.4% with institutional sticky investors at circa 65% means that in reality the shorts are nearer 18% of the free float. That is a huge risk particularly with the institutions/major shareholders adding not reducing and with their own motivations. So that is a significant worry. Hope thats ok!
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