Multiple board members at Asos recently sensed a buying opportunity, after a profit warning caused the fast fashion seller’s shares to drop in value by one third in a single day.
The current inflationary storm caused Asos to cut guidance, predicting adjusted profits of between £20mn and £60mn for the year, compared with former consensus estimates of £92mn. The online clothing vendor said that inflationary pressure was “increasingly impacting our customers’ shopping behaviour”, with a higher number of purchases being returned.
Revenue growth is also now expected to slow to between 4 per cent and 7 per cent in the year to August, compared with a previous estimate of 11-13 per cent (ex-Russia). “As well as the impact of higher returns on warehousing and delivery costs, the guidance also considers both increased markdown and labour inefficiency to clear the returned stock,” the apparel firm said in a trading update.
This led shares to sink to their lowest level in over a decade. Liberum slashed its target price from £15 to £9 per share, saying that a raft of issues including a more cautious consumer, potential over-stocking, and the reopening of physical retail spelled bad news for Asos. The broker kept its ‘hold’ recommendation, saying that while the clothing seller’s valuation was “optically low”, earnings visibility was “clearly non-existent” and the continuous decline in Asos’s gross margin showed no sign of stopping.
Insiders appeared to disagree with this assessment of the retailer’s prospects. Non-executive directors Jørgen Lindemann and Patrick Kennedy bought £490,000 and £240,000 worth of shares respectively.
Although Asos has not indicated the reason behind the transactions, Lindemann’s hefty purchase comes ahead of his own expected rise to the position of board chair in August, when Ian Dyson is due to step down. Asos is reshuffling its management, promoting former chief commercial officer José Antonio Ramos Calamonte to chief executive.
The directors’ purchases looked timely as shares appreciated by 13 per cent on June 17, a day after the purchases were made.
Insolvency partners cash in on demand
The unwinding of pandemic-related support schemes came at a tricky time for UK plc, with newly-published Insolvency Service figures showing a 79 per cent year-on-year increase in company insolvencies in May, the 13th successive month in which insolvency rates ticked up.
Little wonder then that as the FTSE AIM All-Share Index has lost 26 per cent of its value since the start of the year, listed insolvency practitioners have outperformed. Shares in both Begbies Traynor and FRP Advisory are up 10 per cent.
The latter only floated in March 2020 just as financial markets were reacting to the threat of Covid-19, although stimulus measures introduced by governments around the world meant investors’ worst fears never materialised.
Borrowing levels soared, though — SMEs’ outstanding gross debt rose by a quarter between the end of 2019 and the first quarter of last year, according to a Bank of England study published last October.
Many firms will struggle to repay in a weakening economy where consumer confidence is at its lowest level since records began in 1974, according to GfK’s monthly index.
FRP sold £80mn of shares through its IPO, with selling shareholders (the insolvency firm’s partners) pocketing £60mn and the company raising £20mn in new money to fund acquisitions. It has since done five deals, increasing headcount and strengthening a corporate finance arm that should help to make earnings less cyclical.
The shares were first listed at 80p and briefly doubled to 161p last month.
The company then announced a placing on June 15 at 140p a share — at a 9 per cent discount to the previous day’s close — through which existing shareholders sold a further £39mn stake and a further £7.5mn of new shares were issued.
Chief executive Geoff Rowley cashed in £2.6mn and chief operating officer Jeremy French £2.1mn. Rowley said the placing allowed it “to introduce new institutional shareholders” to the register, as well as strengthen its balance sheet — to fund more deals.