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Green is out and red is in for followers of online fast fashion — as the appropriate colour to track falling stock prices on trading screens.
The industry thrived at the height of a pandemic that created a large captive customer base. Shoppers now buy fewer clothes online. They are returning more of their purchases too, pushing up costs for retailers.
Competition remains ferocious. New entrants such as Chinese disrupter Shein and second-hand clothes vendor Vinted are putting pressure on incumbents.
These include Asos of the UK, an industry pioneer. Its shares have lost more than 90 per cent of their value since peaking in March 2021. Boohoo of the UK and Germany’s Zalando have also fallen.
Asos showed few signs of improvements in half-year results this week; sales declines in the UK accelerated to 15 per cent year-on-year. The company made an operating loss of £272mn. Shareholders were spooked. Shares fell on the day to trade at 10 times forecast 2024 earnings.
Investors should view online fast fashion retailers in the same light as the garments they sell: fun, flimsy and ephemeral. Big banks have franchises that can last for several centuries. Physical garment retailers typically have shorter shelf lives. Marks and Spencer was set up in 1884 but its clothing business has been in decline since the 1990s.
Life cycles are even tighter in online-only fast fashion. That is because barriers to entry are so low. Businesses need no special intellectual property. Only modest physical infrastructure is required. Contractors make the clothes.
Consumers have little brand loyalty. They want quick wish fulfilment at rock bottom cost.
Newish chief executive José Calamonte hopes to rebuild Asos as a smaller, leaner and more profitable business.
One golden rule in retailing is to maintain gross margins. That means passing on any rises in supply costs to customers. But this is hard to do under competitive pressure. Asos’s gross margins slipped from 50 per cent in 2019 to 40 per cent in the year to February, according to S&P Capital IQ data.
Asos hopes to repair the damage by getting a better grip on its supply chain. It has written down a chunk of inventory and plans to carry less stock. The broader turnround plan is supposed to add some £300mn of annual benefits.
Calamonte aims to squeeze out a proportion of Asos’s customer base who are more trouble than they are worth. They mainly buy discounted clothes, returning a large percentage of them. The purge should have the effect of reducing sales without a serious impact on margins.
Most indicators such as order numbers, active customers and site visits are moving in the wrong direction. Shareholders are concerned they may be tapped for more cash.
Funds are tight. Asos drew down £250mn of funding facilities, leaving cash and facilities of some £400mn as of February. Cash inflows in the second half should result in a cash burn of £100mn for the full year.
Shareholders in Asos had a great run during its years of growth. But it is now a troubled incumbent rather than a plucky disrupter. Risking capital on a reboot would be unwise, given the fickleness of the fast fashion industry.
Buffett/capital allocation: Berkshire’s cash earns big interest
The US Securities and Exchange Commission wants to require US-listed companies to explain their share buyback philosophies to shareholders. Multibillionaire investor Warren Buffett did so at Berkshire Hathaway’s annual shareholder meeting in Omaha last week.
He and partner Charlie Munger fielded questions as usual about Berkshire’s capital allocation choices. For the first time in more than a quarter of a century, however, US base interest rates have rocketed to more than 5 per cent. Despite the usual questions about what to do with Berkshire’s cash balance — now up to $131bn — the opportunity cost on deploying that cash was finally meaningful.
Buffett notably said he believed Berkshire shares were cheap. That might confuse the average investor given that each one is worth almost $500,000, equating to a market capitalisation of more than $700bn. That is also a 40 per cent premium to Berkshire’s book value, also called the accounting value of equity. Nevertheless, in the first quarter, Berkshire bought back $4.4bn of its stock.
Buffett said he would love to buy a $50bn to $100bn business. But public company processes are often time-consuming and excessively competitive on price. He prefers opportunistic rescue financings or investments in the $5bn to $20bn range, such as with Occidental Petroleum in 2019.
His much-vaunted “float” from Berkshire’s insurance segment now totals $165bn. This cash from premiums paid is essentially free for it to invest, and is stable relative to bank deposits, an apt comparison this year. Meanwhile, Berkshire remains so well-capitalised, it should absorb any property and casualty claims from its customers.
Note that Berkshire’s stake in Apple, about 6 per cent ownership of the company, is worth $155bn. The iPhone maker recently announced a $90bn buyback, which contrasts with Buffett’s almost religious zeal to retain profits and cash flow to invest later.
Instead, his investors still get no dividend and just a modest buyback. They must accept Berkshire passively earning 5 per cent risk-free on its cash.
Simplistically, that reflects just how low a multiple is needed to pass muster for a deal. Take the reciprocal of that 5 per cent and 20 times earnings is the rough break-even purchase price to beat those cash returns. Above that multiple and the deal is not worth it. Berkshire’s big game hunt could continue for some time.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
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