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- savings in technology and procurement

Other areas could also include pull back in marketing spend (this is currently around £200 million or 6% of sales) this is mostly growth spend, with the average marketing spend in the business more around 3.5% of sales, that's £100 million in savings there is they take that decision. CAPEX could also be scaled back as needed, however that may come at the risk of future growth.

anyway, interesting to see what comes out in the report looking to the year ahead. But the key advantage these pure play businesses have over their brick and mortar counterparts is the high variable cost base, giving them huge optionality on adapting to challenging environments, with the ability to dial up or down spend.

you need to focus on the structure of the debt that the business has. The increase in long term debt came from the convertible bond offering from 2021. where they raised £500 cash through a convertible bond offering, that is the long term debt you see on the balance sheet. It's also the cash you see on the balance sheet as well.

The convertible bond has a 0.75% interest rate which is attached to it, and has no covenants. The bond is not redeemable until 2026 and at a target price of around £70 which is not likely to be hit any time soon. So the long term debt is very manageable.

the company also has a £350 million revolving credit facility, of which I believe only around £1.4 million was drawn. There would obviously be covenants attached to this, but if they don't draw the facility which they have not done to date, then the covenants are not a factor.

At the 6 months interims the company had just over £400 million in cash, given the recent announcements its likely that will have reduced to £300 million in cash in the annual report to come, given the move to £150 million net debt. So the business is likely to be left with £300 million in cash and an undrawn £350 million RCF, total £650 million in available liquidity.

debt repayments as said would be 0.75% per year fixed rate (so unaffected by current interest rate changes) with no covenants and no conversion for at least 4 years.

The major issue for the business is that during this financial year the company has burned through £350 million in cash. Like many businesses that thrived through the pandemic, they had got themselves into a position where capital expenditure plans and inventory growth were poorly timed as the company mis forecasted that the pandemic dynamic would continue (recency bias). excessive cap ex and inventory growth were also met with cost inflation in everything from container rates to warehouse labour. As an example growth in capex spend over the past 6 years moved from £78m in 2016 - £345m in 2021.

The nature of the business model which is on high turnover but low margins had little room in its existing cost structure to manage the cost headwinds the business now faces.

I don't know what the thesis is for companies that heavily short the company, but I would imagine that on of the key factors would likely be a belief that the company fails to adapt to the current environment, stays head strong and committed to expansion at any cost and continues to burn through a similar rate of cash, increasing debt and placing the company in a position where it requires to fund raise at some point in the next couple of years.

My personal belief is that won't happen, and the business is likely to adapt to the current business dynamics. I would expect to see a lot of the following in the upcoming report and announcements as they plan to adapt the business

- much tighter intake management
- much tighter inventory turn
- cost management

to sacrifice the future to increase the long term success of the business. that can be seen in the companies decision to continue to offer free returns for example, or to pass their scale savings back into reducing the prices for customers. or investing in automation and new warehousing the reduce delivery times and improve the experience for the customers.

these are all decisions which impact current profitability but benefit the long term competitive advantage of the business.

4. The current ratio for the business in the 6 months report was 1.5 which is healthy. Even with the cash burn I would think that they will likely keep that ratio, as they manage their inventory purchasing better. this can be seen in recent new stories which mention ASOS delaying orders. this is likely to mean a better inventory picture, which will only improve as supply chains eventually return to normal.

5. I also think its important to note the level of insider ownership among ASOS management and the board. All management have skin in the game, with the founder and 3% share owner still heavily involved int he business. All these people have meaningful incentives to ensure the sustainability of the business for the long term.

Whilst the short term picture is extremely negative, these factors don't just affect ASOS alone, all e-commerce fashion platforms have seen their share prices contract hugely over the past year

Zalando - down 70% this year
about you - down 64% this year
boohoo - down 79% this year
farfetched - down 78% this year

this is a sector derating, which last until sentiment changes and the process starts again. If ASOS comes out the other side, its likely their positioning will be strengthened as a result. Based on the most recent balance sheet I think there's a strong change it will.

But would love to get other opinions as well. just my two pennies

Not sure if these are useful, but inverting some of those points, you could argue the following.

1. From a financials perspective, it seems like they are likely to burn some of their cash as opposed to need a fund-raise. From the 6 months statement they had roughly £400m in cash on the balance sheet and only £1.4m drawn from the revolving cash facility. Based on their recent forecasts regarding net cash position at year end, they are likely to burn through between £15m - £65m of their cash, not great obviously but it would still leave them with a much improved cash position from previous years. Based on their experience of being caught at the start of COVID with very little cash and needing to do a fundraise, the management have made a commitment to ensuring they have a very solid buffer of cash on the balance sheet in the future. It's a conservatively run business so I don't see them turning around on that focus.

2. Net Debt will likely increase, but its important to look at the type of debt that they are holding. The vast majority (£460m) is from the convertible bond raise which they did in 2020/21 (only £1.4m is from a banking facility). That was a sensible move, which gave them the ability too raise large funds at very reasonable rates, I believe its around 1.5%. And the conversion price on the bonds is in the £70 region so is unlikely to be converted at any time soon. The servicing of that debt payment should be made all the more easy as interest rates rises give them a better return on their short term cash deposits.

3. The business itself has quite a lot of optionality in how to it can respond to current market conditions to either increase the profit / cash flow metrics in the short term or look to continue to invest for the future of the business. Depending on what type of investor you are and how you view the potential intrinsic value of the business will mark which one of those that you would like to see prioritised.

The benefit of the business is that they have relatively low fixed costs but high variable costs. those variable costs such as marketing spend can be turned on and off relatively easily. for example marketing spend as a % of sales this year is at 6%, this is part of their plan to increase the growth of the business, particularly in the US market. in previous years the average marketing spend was around 4% of sales. they have 2% of sales revenue which could easily be turned off if they decided to manage the business more conservatively (bear in mind that even at 4% of sales then business was still growing north of 20% per year. 2% of sales would equate to almost £80m - £90m of savings.

I think its important to note, that ASOS has taken to the decision to make those additional investments in marketing, automation, warehousing etc.. at the expense of current reported figures. they could if they wanted to run the business in a much more "profits today" mentality, but they are choosing to

"Wouldnt there need to be an RNS for this ?" - No the holding is 2.97% so just below the disclosure limit of 3%. I would imagine that position sizing is purposeful to prevent the need for disclosure.

Based on their most recent update, its likely that their book of claims within national accident law is likely to be worth north of £10m+ in future cash profits.

Thats an asset which does not appear on the balance sheet, and makes up over 60% of their current market cap on its own.

There is a large store of value in this group of businesses, which is not fully appreciated by the market because of poor current profit metrics and historical regulatory impacts. For anyone who has a 2-4 year view and can be patient, its likely they will be rewarded.

For example, the Bush & Co business (likely valued in excess of £35m - £40m +) and the National Accident Helpline claim business which as the capacity to deliver circa 40k claims enquiries per year on an ongoing basis (for reference Express Solicitors who are actively acquiring the book of claims from firms who are deciding to exit the personal injury market are currently paying on average £500 per claim in the book). If a private law firm were to purchase National Accident Helpline to use as their marketing funnel to drive personal injury leads for their firm, NAHL would have the capacity to deliver "rough estimate" - £10m - £20m in cash profits per year if those claims are processed in house. I would think a private buyer would be willing to pay roughly £30m - £50m for that earning power.

add that all together and your left with

- £10m book of claims in NAL
- £35m - £40m Bush and Co value
- £30m - £50m National Accident Helpline business value

total - £75m - £100m in value

take off the £14m of debt, roughly £60m - £85m

As the company pays off the debt, and continues to execute on its plans and delivering solid cash flow, its likely the valuation will reflect over the medium - long term.

If anything the price of these businesses at current levels presents an extremely attractive risk reward, with the likely hood of any meaningful loss minimal given the value of the assets. And the strong potential for meaningful upside over the next 2-4 years.

Its through "MASH Holdings" which is his investment vehicle.

An interesting change I've recently noticed in the ownership of ASOS. Mike Ashley of Frasers / Sports Direct has increased his holdings in ASOS from 1% to now 3% of shares of the company in the past month or so. There is no official notice of holdings, but it can be seen on Simply Wall St under ownership if anyone is interested.

Note that he does not hold any stake in Boohoo