Daily Digest:
w/c 24th June - a relatively light data week, with spotlight on US GDP and Durable Goods Wednesday, then the Fed’s preferred inflation measure, the MoM and YoY PCE data on Friday

What do the ASOS results mean for Boohoo?

Intermediate

ASOS (LON: ASC) reported results – or at least a trading statement – last week and the interesting thing here is what is this going to mean for Boohoo (LON: BOO)? For whatever reaction there was going to be to those ASOS results has already happened – but we might be able to position ourselves for the Boohoo revelations.

Now there is a certain supposition here, for the Boohoo AGM is on the 22nd, Thursday. It’s normal that an AGM will be accompanied by a trading statement. At the very least the Chairman tells the shareholders how things are going right now – given the nature of these things that usually also translates into a release to the Stock Exchange. Note the weight being put on “usually” and “normal” there. It is possible for this not to happen – but it would be an odd AGM if it didn’t.

ASOS and Boohoo aren’t exactly the same businesses, no

It’s not entirely true that ASOS and Boohoo are in the same business, one is in slap (makeup) the other schmutter (clothes) but they’re close enough to be subject to the same market stresses. And the big one has been that online sales leapt during lockdown – pretty must one of those D’Oh, or you don’t say? – statements. But there’s something we didn’t know. That leap, was it structural or was it cyclical?

asos

That is, we know that online has been eating retail. It’s been going at about 1% of the total retail market for a couple of decades now. Lockdown lead to a leap of at least 10 percentage points of the entire market, at one point 15. So, post-lockdown would the 1% continue from that new and higher starting point – the structural change? Or, would we see matters revert to that underlying structural change as the cyclical one fell away? We now have the numbers from ONS to tell us. It was a cyclical change. Online is still eating retail but at that 1% pa and we’re back to levels where the lockdown leap might never have happened. 

So what went wrong for both Boohoo and ASOS?

There are two implications to this. One is that valuations were definitely too high because at least some investors believed the structural idea. Well, results since then have knocked that out of people. But there were also managements who believed it and geared themselves up to service this permanently higher level of retail spend. Took on much higher cost bases than the traffic – as it fell back – would support.

boohoo

Of course, there were people like Made.com who got it so wildly wrong they went bust. But both ASOS and Boohoo definitely made this mistake at least in part. Believing that the lockdown boom meant some permanently higher level of trade and they allowed a cost base to arise that was based upon that. So, the question then becomes can they recover from that?

We can also put this another way around. Profits in online retail have been really thin on the ground just recently. We want to know whether it is possible for there to be profits again. Maybe the environment is now so competitive – the influence of Shein perhaps – that profits will be forever elusive?

Both ideas – mis-sizing of the cost base, or rising competition – do lead to the same point. Is it possible for a good management to make profit these days? Even given the varied stories we can tell about market conditions?   

Well, what can we learn about Boohoo from ASOS then?

Which is where we can take a guide from ASOS and apply it to Boohoo. For ASOS is claiming to be back to profitability. They’ve also done it by giving up – not trying to compete for – that last 10% or more of marginal trade. And cutting their cost base to match the lower revenue and gross profit possibilities.

So, we know that profit is possible in this sector. It’s just a matter of doing things the right way – it’s a management competence question that is.

This doesn’t mean that Boohoo will be announcing profits. It doesn’t even mean that Boohoo has learnt this lesson. But it does mean that it’s possible to win even in these market conditions – which leaves us with the question of whether Boohoo will have taken, or is taking, the opportunity to do exactly that. Stop competing for the last 10% and more of entirely marginally profitable trade, cut back the cost base and thus make good profit off a smaller revenue base? 

Well, start your engines and place your bets on that. As we say there’s no certainty that we’ll get an announcement from Boohoo that gives us insight onto that although the AGM is when we’d rather expect such figures. The point being, ASOS has shown that it is possible to turn the corner, well, is Boohoo about to show the same or not? 

Editor

Tim Worstall is a freelance journalist who also used to be the world's leading scandium wholesalers (one of the rare earths). His Wikipedia entry gives a flavour.

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