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Been keeping a close eye on this one.
For me... given they are reducing their inventory so much, and at a faster rate than expected, to still be seeing free cash outflows is disappointing. This after all is the year of 'significant cash generation'.
For all the turnaround efforts sales are coming in worse than expected, so management initiatives aren't bearing fruit yet.
I agree with BumBum's sentiments.
We have a massive convertible due 2026. The business isn't generating FCF to a large extent in 2024. Probably a modest amount in 2025. I think management can see that they don't have the cash to operate freely, and won't be generating this cash naturally over the coming 2 years.
Therefore management look at what they can sell. In this case it is really only Topshop. I think they might get £150 - £200m for it. This would be about 1x sales... which is more than fair in current market conditions.
Anything less than £150m and I think the market doesn't care as it would still leave c. £150m in debt. Anything more than £200m and suddenly the balance sheet looks like its fixed, no dilution, and shares probably rise.
But to echo BumBum... everything else that is depressed is starting to rise quickly... but not here.
For the the disappointment yesterday was the realisation that debt might go down too slowly this year.
This massive debt pile is a weight around Asos's neck. For a business that is this cheap on P&L metrics, the FCF generation is so poor.
180m EBITDA is huge... vs the market cap. However by the time you take out the massive £130m capex, and £45m automation costs, there is almost no free cash flow.
I mean WTF is the £130m capex going towards. I feel this business should be running on about £20m capex when it isn't growing and opening warehouses. If capex was £20m, we would be reeling in about £160m FCF and that debt would be gone in 2 years.
Debt is still 300m. Forecast of about 180m EBITDA. 130m capex. They have a 45m investment in automation for a warehouse they are automating lol.
So that is a 5m reduction in net debt this year?
This is why the shares are going down. Their debt is still massive and they are only going to reduce it slightly this year.
Hence the Topshop sale.
Starting to make more sense now...
There is a massive contradiction in these results.
One the one hand they say the turnaround is working. They have cleated 84% of that stock. The foundations are in place etc etc.
All this makes it seem like most the changes they want to put in place are in. Then they mention says -5% to -15%, which is pretty bad. Especially with £30m extra marketing.
This sort of plays into the hands of the structurally challenged arguments. Turnaround mostly done. Yet good margins are non-existant, and sales decline hasn't been arrested.
As always something for bulls and something for bears.
As the bottom end of their sales forecast we are looking at 180m EBITDA. Given the D and A is about 140m, that is 40m EBIT.... or a 1.5% margin.
Bit mixed. Not sure the market really wanted another year of double digit sales declines.
No-one is going to buy this in big volume until Wednesday is out of the way (for good or bad). That is why I thought this Topshop deal wouldn't move the shares much.
People are looking for a viable, profitable business here. Management will give some indication of how 2024 should look on Wednesday. That is the deal breaker here.
They got 365m last time. However valuations have dropped quite a bit since COVID boom days.
I think the business has 265m sales.. of this roughly 130m was online.
If they pay 1x this, it is about 130m.
I think debt is more like 300m? So pays off a decent chunk of debt.
To be honest I think trading makes the difference here. If trading is worsening this won't matter. If trading is improving it will definitely spur things up.
I think this could go one of two ways. When Capita sold their crown jewels it did nothing for the share price. Depends on price and how current trading is.
If they are selling assets to pay down debt because trading is worsening then its obviously not good.
Wonder if Mike Ashley has a hand in this. I thought he wanted to buy these brands.
Nah. In the FY trading update, they said c. £430m at 3rd September. This is an estimated figure as the accountants have signed off the accounts yet. In the notice today, they said at the 3rd of September is was £428m.
So they now have an exact figure for what it was on the 3rd September, and its £2m less than their approximation.
Pendragon. Restarant group. Now Kin and Carta.
I think the UK stock market is its cheapest in 20 years. Bids coming through thick and fast now. The UK stock market is going to be hollowed out of these irrationally cheap companies.
Asos would be one of them... but its shareholder structure is such a hinderence.
For clothing retailer I believe there is a natural limit of sales, and then you find you have to improve pricing, product, marketing and delivery time to grow sales further.
That is why Asos used to reset their margin target every 4 or so years (as growth slowed they needed to invest in pricing) and moved from a single warehouse model to multiple warehouse.
This is what Next does so well. They have their core market, they serve it well and they make decent margins. The never sacrificed margins for an extra 20% growth.
Shein will be able to take a portion of the market with their proposition but without better delivery times, a faster fashion proposition, and a better brand they will reach their limit too.
That is why I am ultimately not too concerned about Shein. They might take some share but it will never cause existential problems for Asos.
...and if Shein wants to open local warehouses, well they could probably buy Asos. But if they do open local warehouses they have to start paying tax on their imports like everyone else.
I'm in. Too cheap for the business its in.
Next has a market-cap of £10bn. Asos has a market-cap of £450m.
Next is valued at 2x sales. Asos is valued at 0.25x sales.
They are completely different investment cases. Next is a well-run business, but you own it for low growth, and a decent dividend yield. The shares have been ranged bound for 10 years. You probably buy it when the valuation is towards the bottom end of its historical range, and sell it when its towards the upper end.
Asos you own it for its restructuring story, and margin recovery. You own it because there should be a decent business in there when it has shed unprofitable customers / markets. Asos has the additional complication of a balance sheet headache which Next doesn't have.
They may operate in the same sector but to be honest, the investment cases are completely different.