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“They could double or even treble from here,” said one investor of Asos shares when we tipped them in 2019.
That investor, Fahad Hassan of Albemarle Street Partners, made the prediction when shares in the online fashion retailer were trading at £31.43. After a savage slump to about £10 as coronavirus panic struck last spring they recovered strongly to touch £59.18 last month before slipping back to £51 now. Can they go on to the £90 we predicted?
The improvement in operational efficiency we talked about then, as teething troubles at new warehouses in America and Europe were tackled, has largely come to pass, which is leading to the margin improvements we wanted to see. But the epidemic has also changed the company’s outlook.
Although Asos, even as an online retailer, suffered in some ways – not least in a collapse in demand for party outfits, previously one of its strengths – it is well positioned to benefit from the deeper tides of change in retail.
We have all seen how the high street has been hit and much of the damage will not be undone even as coronavirus restrictions are eased. Many big names have already disappeared, never to return.
Never to return, that is to say, in the form of bricks and mortar shops. But Asos itself is in the process of taking former high street favourites and turning them, it hopes, into successful online-only brands.
It bought several household names, including Topshop, Topman and Miss Selfridge, from the administrators of Philip Green’s collapsed Arcadia empire and Mr Hassan has high hopes for their potential as part of Asos.
“The brands it bought had online or wholesale sales [made via concessions in department stores] of £265m a year and that is the sum that Asos paid to acquire them,” he said. “It may not sound like an extreme bargain but those brands had total revenues, including sales from physical shops, of about £1bn a year and we expect a lot of those sales to migrate online.”
This feels intuitively likely: if you are a fan of Topshop, for example, would you stop buying from it simply because its physical shops had disappeared? Surely you would continue to buy from it online instead, especially as other brands have vanished from the high street too, giving you fewer bricks and mortar alternatives.
“I think Asos could make online sales of about £400m from those brands – far more than the £265m they produced before,” Mr Hassan said. “But the company has been downplaying the opportunity, perhaps mindful of investors’ sceptical stance towards the stock following the warehouse problems. When, as I expect, the true scale of the opportunity is apparent in actual sales numbers, the shares should respond accordingly.”
The acquisition of the former Arcadia brands should also help Asos’s margins, already improving as the warehouse problems diminish.
“Those extra sales from Topshop and so on will be fulfilled via the group’s existing logistics infrastructure,” Mr Hassan said. “This makes more intensive use of those assets and hence improves efficiency and margins. They have already increased from their low point of about 2pc to closer to 5pc and we expect them to reach 7pc before long.”
There is more to the opportunity than this one acquisition, however: the move to online shopping seems sure to survive the end of the pandemic and Asos has the product range, the customer loyalty, the supplier relationships and the technology to be among the winners.
“The clothing market in Britain is worth about £37bn in annual sales and about a third of that figure is currently online,” Mr Hassan said. “I can see that third becoming a half and Asos taking more market share. Then there is the opportunity in America and Europe, where it has built the infrastructure and can begin to grow its business.”
He acknowledged that rivals such as Boohoo offered faster growth and higher margins but said this was reflected in a lower valuation for Asos.
“Boohoo is much more highly valued. There is nothing to say you shouldn’t own both stocks [Questor tipped Boohoo in 2018 and advised readers to hold on two months ago] but I am latching on to the long-term online shopping theme in what I think is a prudent way,” he said.
“Absolutely the shares could still double from here, although we would review the case at £65.”
Questor says: hold
Share price at close: £51
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