ASOS’s share price has plummeted this year as profit warnings, bungled international expansion and fierce competition from rival Boohoo [BOO] weigh on the stock. To make matters worse, analysts think that there’s more downside to come.
Small wonder that the former stock market darling is now one of the most shorted stocks on the FTSE 100. According to the Financial Times roughly 10% of ASOS' [ASC] stock is out on loan as traders try to profit from the online clothing retailer’s misfortune, a significant contrast to Boohoo's negligible short interest.
One of those looking to benefit is Gladstone Capital Management who have been betting against ASOS since the start of last year.
George Michelakis, founder of Gladstone Capital Management, wrote in a letter to investors: “Asos has demonstrated increasing signs of a strained business model.”
Why are ASOS shares being shorted?
ASOS's blunders are well documented. It messed up its Black Friday offering last year, while problems with its US warehouse dented stateside ambitions.
Expectations are that ASOS will now earn £30 million in profit this year. This translates as a slim 1% profit margin. To protect dwindling margins, ASOS has resorted to requesting discounts from its suppliers - a clear sign that finances are strained.
Asos will not only have to ‘win’ Black Friday in November, but also steal back customers lost to rival Boohoo in the process. International sales could be key. Sherri Malek, an Analyst at RBS, thinks that Europe and the US could be big revenue drivers for ASOS. Malek suggests that if ASOS can achieve a third of its UK sales in these markets it could triple its £2.4 billion in annual sales over 10 years.
|PE ratio (TTM)||32.36||73.44|
|Return on equity (TTM)||14.38%||19.64%|
ASOS & Boohoo share price vitals, Yahoo finance, 2 September 2019
What can ASOS do?
Asos will not only have to ‘win’ Black Friday in October, but also steal back customers lost to rival Boohoo in the process. International sales could be key. Sherri Malek, an Analyst at RBS, thinks that Europe and the US could be big revenue drivers for ASOS. Malek suggests that if ASOS can achieve a third of its UK sales in these markets it could triple its £2.4 billion in annual sales over 10 years.
Why is Boohoo so dominant?
This year Boohoo’s market cap eclipsed ASOS’s, and now stands at £2.75 billion compared to ASOS’s £1.90 billion.
Boohoo's success is its ability to acquire distinct brands to serve different audiences, often at knockdown prices. These include Nasty Gal, Karen Millen and Coast. For example, Nasty Gal appeals to a younger audience who will buy cheaper items in bulk. While Karen Millan will offer higher priced individual items aimed at an older, moneyed audience.
This has helped Boohoo record quarterly revenue growth of 45.7% (TTM), well above ASOS's 13.5%. Things get even worse for ASOS when you compare its -87.8% quarterly earnings growth to Booboo’s 22.6%. Boohoo appears to have the rivalry sewn up, with this year’s profits forecast to be double that of ASOS.
How do the share prices compare?
Back in late April, ASOS and Boohoo's share price were both trending upwards for the year. Since then, the two stocks have experienced vastly different fortunes.
ASOS stock is up just 0.42%, which compares poorly with Boohoo's huge 50% gain. A particularly bleak moment was 17 July when ASOS stock dropped a massive 23% following its second profit warning in the space of seven months. The warning revealed ASOS expected to make between £30 million and £35 million in 2019, a third of last year’s take and well below the City’s forecasted £55 million.
Boohoo shares' year-to-date growth
Who to buy?
Despite the short selling, ASOS could be worth a long-term bet if the firm can make good on its international promise and deliver over Black Friday. Although that’s a risk for any trader to take, given the disappointing performance thus far this year.
Boohoo, for all the praise, could be overvalued. The stock carries a P/E of 75.44 and an eye-watering price-to-book of 10.62. ASOS has a significantly cheaper PE 32.83X and price-to-book of 3.87, according to Ycharts. The next key milestone in this rivalry will be in November, when Black Friday kicks off in earnest.