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Everyone loves comeback stories. Rocky to The fighterHollywood has been producing them for decades. FTSE 100 IndexWe have had Rolls Roycewho went from almost zero to hero in the space of four years. Could it be ASOS Is the (LSE:ASC) share price about to do the same?
I say this because the online fashion firm's shares rose 20% today (5 September) following a positive update on its FY24 trading. However, at 440p, they are still 94% lower than their all-time high of 7,556p hit in 2018.
Let's dive into the statement to see what's going on.
The update
The company has made three major announcements today. Firstly, it is refinancing part of its debt, with the issue of convertible bonds worth £250m and a partial repurchase of existing bonds worth £500m.
It then announced that it will launch a joint venture with Danish group Heartland, which will buy the Topshop and Topman brands from ASOS. Heartland will own 75%, but ASOS will retain certain rights to the brands in exchange for a royalty fee that will allow it to continue selling them on its site.
Incidentally, Heartland is owned by Danish billionaire Anders Holch Povlsen, who has a large stake in ASOS. He was also Scotland's richest man last year.
ASOS will receive £135m for the two brands, which will be used to strengthen its balance sheet. Net debt stood at £349m in April, which is encouraging.
Finally, the firm expects sales for fiscal 2024, which ended in August, to be slightly below its previous forecast, which predicted a decline of 5% to 15%. However, it sees adjusted EBITDA (underlying profit) at the high end of market expectations.
This indicates an improvement in profitability and operational efficiency despite continued sales challenges.
Progress underway
In 2018, ASOS was one of the darlings of e-commerce. However, a boom-and-bust cycle triggered by the pandemic saw the company’s profit margins shrink. In April, it posted a half-year loss of £120m.
However, there are some encouraging signs. CEO José Antonio Ramos Calamonte's attempt to turn ASOS into a company that “Offers sustainable and profitable growth” seems to be gaining momentum.
Annual revenues remain above £3 billion, giving a cheap price-to-sales ratio of around 0.16.
Meanwhile, the joint venture also looks like a good deal, as the retailer will be able to continue selling Topshop clothing while improving its debt position.
That said, the sale is less than what ASOS paid in 2021, and the transaction is expected to have a negative impact of between £10m and £20m on EBITDA this year before improving over time.
Should I buy ASOS shares?
What worries me in this case is the competition, especially from Shein. The Chinese fashion giant's business model allows it to design, produce and publish new products on its app in just seven to ten days.
ASOS says its Test & React model has improved to take products from design to factory floor in less than three weeks. However, that time is still a far cry from Shein’s rapid production cycle.
Unlike Rolls-Royce, where jet engine manufacturing presents extremely high barriers to entry, ASOS operates in the online fashion market, which is much easier to enter and hyper-competitive. Rolls’ profits are rising, while ASOS’s are only just catching up.
The stock could continue to rise, but I don't foresee a turnaround like Rolls-Royce's. I'm not going to invest.