Shy Bear is a reticent fellow but a short seller currently without exposure to this sector. Having listened to a, most excellent, bearcast he offers up a few thoughts. Ignore these stark warnings at your peril should you be foolish enough to contemplate a spot of bottom fishing. Over to Shy Bear who opines:
I think in differentiating between the two companies, it's important to recognise that Boohoo (BOO) is a brand company. It has its own very cool brands. Not defending the valuation, or the “slave labour” stuff, but it has been very successful at buying/building fast fashion brands. The power of its brands perhaps offer it some protection from other online retailers, such as Amazon, ASOS (ASC) and the like. This only lasts as long as its brands are cool, and given it sells into a demographic that can barely concentrate long enough to finish a sentence...
ASOS on the other hand is largely about pedalling other company's brands. In this sense, I think it is much more exposed to competition from the likes of Amazon and other online retailers. I have no doubt that the UK is in recession. However, my thesis is that ASOS has little to no moat and that it is likely feeling the pressure from the other big boys, as they start to bump against each other in a rapidly maturing market place. In that context, we could see returns effectively dropping to some return on replacement cost of the infrastructure and the brand awareness. I'm sure you are aware of the bear thesis, but just in case: It capitalises tonnes of R&D. I think I remember it being the salaries of about 800 IT heads that it capitalises. In this sense, the true EBIT is now below zero (I would argue). You might want to check the maths on that, but you get the idea.
- Negative EBIT after adjusting for capitalisation
- Declining sales growth
- Long term declining margins
- Brand value? (in the industry, apparently if you start selling through ASOS it's basically the end of your brand)
- Growing competition from Amazon? And others...
- Large cash burn
- Massive payables (really big).
The last one is important. AO World (AO) was complaining about how it was having to invest in working capital because its suppliers were finding it increasingly difficult/expensive to insure their receivables. I bet ASOS will face the same issues. At the year end it had £550 million of payables - I think that was about 6 months of payables... I bet you it will start to find suppliers ringing them up. I think it could get somewhat sticky for ASOS and soon. Boohoo’s star will take longer to fade but fade it will.
Filed under: Boohoo, ASOS, Woodlarks, Roland Cornish, Optibiotix, Zafar Karim, Eight Peaks, caption contest
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