ASOS and Boohoo are locked in an eternal battle for investor interest — but which is the best share to buy in 2023?
ASOS and Boohoo have many things in common. To start with, both shares are extremely volatile, and both operate in the fast-fashion online space with no physical shops. This made the brands excellent buys during the pandemic-era lockdowns — but the lockdowns are over, and the companies now need to stand on their own merits.
Having seen huge share price falls after recent results, is either a buy? I’d contend that the picture isn’t as bad as investors make out.
Let’s break it down.
Like all retailers, ASOS has been navigating a challenging operating environment while strategically focusing on driving profitability.
In H1 FY23, the company saw revenue decline by 8% to £1.84 billion compared to the same half in the previous year. This fall can be attributed to deliberate actions taken by the company to improve profitability, and it’s worth noting that sales momentum improved in January and February, reflecting planned profitability actions, right-sizing of stock, and a higher online penetration rate.
As usual, ASOS witnessed sizeable variations in sales performance across regions. UK sales were down 10% year-on-year, while Europe remained flat. The US experienced a 7% decline, and the Rest of the World saw a 12% decrease. But importantly, ASOS continued to grow its market share in the UK’s online retail market among its core 16-35 demographic — a fact glossed over by the shorters.
The company achieved over £100 million of profit optimization and cost-saving initiatives in H1 FY23 under its Driving Change agenda. Adjusted gross margin remained broadly flat at 42.9%, with encouraging progress seen in February, where it increased by over 300 basis points year-on-year. This margin improvement was supported by lower freight and duty rates.
Further, ASOS successfully reduced its stock levels by 9%, slightly ahead of the planned reduction of 5% for H1 FY23. This indicates the company’s commitment to achieving a cleaner inventory position and aligning supply with demand — though this necessitated booking a £21 million loss in H1 derived from stock clearances, and setting aside £107 million in provisions for future inventory sell-offs.
The company remains aware that it is operating in a different economic environment. It also aims to achieve over £300 million of benefits by the end of the fiscal year, with over 95% of circa £200 million profitability benefits in H2 FY23.
Looking forward, it expects adjusted gross margin to improve by approximately 100 basis points, with a run rate up more than 300 basis points year-over-year. And it’s planning for positive cash generation in H2 FY23, targeting £40-60 million adjusted EBIT and over £150 million of free cash inflow.
CEO José Antonio Ramos Calamonte notes that the key ‘focus is on improving our core profitability, prioritising order economics over top-line growth…while some of these changes have impacted short-term sales growth, there are many causes for optimism as we progress through the second half of the year.’
Yes, the fast fashion company has £432 million in debt and saw negative free cash flow of £263 million. But it also has access to an extended revolving credit facility of £350 million until November 2024, alongside cash and undrawn facilities totalling over £400 million.
With Philip Green holding a sizeable number of shares, a buyout is not inconceivable at the current price level. The alternative is likely a capital raise — but Green has a history of buying out clothing companies trading at a discount to their brand value.
Boohoo may be suffering right now, but investors should take a step back to consider its wider market position. It’s seen sales grow by 43% over the past three years — and in the UK market specifically, sales have surged by an impressive 61%.
This growth can be attributed to ASOS’s ability to capture market share through its desirable product offerings and customer-centric approach. Further, Boohoo has successfully invested in automation in its Sheffield facility, leading to best-in-class operational performance and significant cost savings.
Like ASOS, the company’s focus on operational efficiency has resulted in a leaner inventory position, with stock levels reduced by 36% year-over-year while gross margins only dipped by 1.9% to 50.6%.
By optimising its supply chain, Boohoo has been able to reinvest margin improvements into speed and price, which are the two qualities which originally made the company a shopaholic’s favourite.
Boohoo has made substantial progress in its phased launch of a US distribution centre, set to be operational later this year in order to capitalise on the vast market potential of the United States. This confidence perhaps marks it out against ASOS.
In recent results, Boohoo saw net Free Cash Flow of £30.2 million even after significant capital expenditure of £91.2 million. This robust cash flow supports the company’s growth ambitions and provides substantial liquidity headroom of £330.9 million — overall, these figures are objectively far better than at ASOS. Better still, it finished the full year with £6 million in net cash rather than stewing in debt as most analysts had predicted.
It’s projecting a medium-term adjusted EBITDA margin of between 6%-8%. And Boohoo aims to achieve double-digit revenue growth by leveraging its scale, unlocking cost deflation, and driving overhead efficiencies. Boohoo could yet deliver sizeable returns for high-risk investors.
CEO John Lyttle argues that ‘over the last three years, the Group has achieved significant market share gains. Looking ahead, we are investing for the future growth of this business with automation, local fulfillment capacity in the US…our confidence in the medium-term prospects for the group remains unchanged, and as we execute on our key priorities, we see a clear path to improved profitability and getting back to double-digit revenue growth.’
Of course, revenue fell by 11% to £1.77 billion. But in the context of double-digit inflation, the business looks mildly oversold in my view.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.