Is it all over for ASOS?

<p>Another ASOS trading update, another ASOS profit warning. But first the good news: ASOS Plc., the troubled online fashion retailer, this morning reported a 15% […]</p>

Another ASOS trading update, another ASOS profit warning.

But first the good news: ASOS Plc., the troubled online fashion retailer, this morning reported a 15% jump in fourth-quarter retail sales to £240m.

The problem is, when a company has been proven to have such a volatile performance profile as ASOS’s, not to mention such volatile shares, it’s the bad news the market will latch on to more readily, not the good news.

ASOS also warned this morning a phase of significant investment would prevent profits from growing during the forthcoming 2014-15 period.

The bad news is compounded by the fact that whilst ASOS ‘s retail trading during the three months to 31st August is not to be sniffed at, it does represent a slowdown compared to the 25% rise in Q4 last year.

The regional breakdown isn’t promising either: UK retail sales increased 33% compared to a 43% rise in the third quarter. International sales rose 6%, having been up 17% previously, with impact of international weakening likely to be deeper given that ASOS makes 59% of total sales from regions outside the UK.

ASOS is still suffering from the impact of a fire at its Barnsley, northern England, distribution hub estimated to have cost the firm £25m to £30m in Q4 sales, even though the company was insured for the losses.

Today brings ASOS’s third profit warning in six months.

In June, it warned profit for 2013-2014 would miss forecasts by 30% as the then strength of the pound eroded revenues. The fire was a further disruption.

In March, ASOS announced short-term profits would take a back seat to a spending hike on infrastructure, because at the time, the company was expecting increased demand.


Can ASOS come back from this?

To top ASOS’s poor showing in the last three months, it said today its fourth-quarter gross margin was 640 basis points lower year-on-year.

By the look of the share price today, which has traded as much as 15% lower, the market may be beginning to wonder if ASOS is capable of making a comeback after being hit by so many troubles in such a short space of time.

Well, the dark fear in the background of investors’ minds when a firm like ASOS gets into trouble is that it could end up like far too many big UK retail names, with its back against the wall and forced to go into administration.

The latest example of this is mobile phone retailer Phones 4 U, which went into administration after a number of its suppliers said they would not renew network agreements.

It appears Phones 4 U doesn’t have the financial reserves to see it through such a shock to its cash flow, and its credit profile is poor after its private equity owners drew a £200m cash dividend last year.

But ASOS is nothing like Phones 4 U.

For one thing, its credit appears to be in excellent health.

I calculate its credit rating would put it in the A- category used by credit rating agencies like Moody’s and Standard & Poor’s.

I base this generic credit rating on debt, rate of borrowing, re-payment deadlines and cash flow.

Such a rating would give a default risk of less than 0.1% according to Thomson Reuters data, and the rating would put ASOS on a par or higher than retailers like Next, Debenhams or M&S.


ASOS’s cash flow will probably remain strong

A lot of ASOS’s credit strength comes down to free cash flow. ASOS booked its highest ever free cash flow last year at £42m.

It seems likely that even if things were to deteriorate so much the firm returned to 2011 levels, ASOS would still be able to access the ample cash flowing through it.

In the worst-case scenario, my view is the stock might remain as volatile as it has been over the last few years and that might begin to cause reputational damage to the firm.

In turn, management might feel compelled to seek shelter from public scrutiny by de-listing the stock.

In that case, if ASOS gave the signal, we would expect a private equity or industry buyer.

But that’s in the worst case.

It seems more likely operations and revenues will stabilise in the second-quarter of 2015 and ASOS would probably post a pre-tax profit of £63.74m in the full year of 2015 compared to the £45.21m expected this year.


Selling momentum might be ready for a pause

Here at City Index, we called for more selling of the stock after vague merger talk drove the shares higher late last month.

Indeed further stock selling did take place, but in a very orderly fashion, suggesting momentum on the downside is not as strong as it was earlier in the year.

Having formed what looks like a fair head and shoulders pattern over a long range spanning from the summer of 2012 to date, the stock is reverting to its long-standing average and feels like it may be forming a base.

That would be in keeping with my view of ASOS having the opportunity to stabilize within a year or so.

Having said that this company has seldom failed to surprise and not always in a pleasant way.

That brings us back to ASOS’s persistent reputation as a short.

It’s a reputation ASOS may take longer to shake off than a year.

ASOS post pft warning III 2014


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