Wrong About ASOS plc
This experience has taught me to say "NO" more often
Back in January 2023, when I started publishing my research, one of my first articles was about ASOS plc, a UK-based online fashion retailer. At the time, I saw potential, but it’s fair to say that things haven't panned out the way I’d hoped. And over the past year, as I’ve broadened my expertise, I’ve realized something important: fashion might not be my strongest suit after all.
My initial thoughts were that ASOS had all the ingredients of a business that gets better with scale and it would be worth multiples of what I paid, as long as the business continues to improve. I was mistaken.
From the start, I was aware of some of the risks. But looking back, I didn’t fully grasp just how tough the fashion industry can be. It’s a rapidly changing space with a lot of moving parts. Millennials and Gen Z, for example, are shaking up traditional consumer habits. They’re focused on sustainability and social justice in a way that previous generations weren’t, and they’re pushing for these values in their shopping decisions. That’s good but adding to that the increasing shift towards online shopping, higher return rates, and the rise of new tech like virtual reality shopping, and you’ve got a very complex puzzle to solve. This became simply to hard for me.
On top of that, fashion buying behavior is notoriously unpredictable. ASOS, while popular, isn’t exactly a brand that leads the pack or sets trends. In the end, I just don’t feel like I have an edge here. Taking all these factors into account, it's clear to me that the fashion industry is quite complex and challenging to understand.
During my time holding ASOS, the company faced quite a few headwinds, and the story has shifted. I’m not particularly confident in the new CEO, nor am I thrilled about the dilution and liquidity issues the company has dealt with.
That’s why today, I’ve decided to exit my position with a 9% loss. It’s never fun to take a hit, but sometimes it’s better to cut your losses and move on. My decision comes even though ASOS has made some positive moves recently. They successfully refinanced their debt, sold a majority stake in Topshop and Topman to a joint venture, and even repurchased their Convertible Bonds due in 2026 at a discount - reducing net debt by around £150m. These are solid developments, no doubt, but they’re not enough to change my overall outlook.
The fashion retail landscape is evolving fast, and ASOS is up against fierce competition from fast fashion brands. Given the current economic climate, I’m just not convinced about ASOS’s long-term potential. Sure, there might be short-term opportunities for gains, but that’s not the kind of game I’m looking to play right now.
Management is sticking to their turnaround strategy, projecting a return to growth in the second half of FY2024 and better profitability by FY2025. But, honestly, there’s a lot of execution risk involved. ASOS has to juggle cost-cutting measures, customer retention, and market share growth all at the same time - and that’s no easy task for anyone.
So, for now, I’m stepping aside. But as always, I’ll be keeping an eye on this retailer and watching how this story develops. Who knows what the future holds?
Closing Remarks
In summary, ASOS is navigating challenges tied to revenue declines, profitability, debt management, and customer retention, all of which present substantial risks to its recovery strategy. Also, the company's balance sheet shows high leverage, with a total debt-to-equity ratio of 158% and I don’t like it.
This experience has taught me to say NO more often, especially when navigating industries I don’t fully understand.
If there are any changes in my thought process, I will let you know.