- Online fast-fashion retailer raises £75 million
- Turnaround prospects remain uncertain
- Broker warns additional fundraising could be required
Online fast-fashion retailer ASOS (ASC) has gone cap-in-hand to investors for fresh funding as it tries to dig itself out of a financial mess. The one-time stock market darling confirmed it has raised £75 million through a share placing priced at 418.1p in order to support its ‘Driving Change’ agenda and bolster the balance sheet.
That placing price is bang on yesterday's (25 May) close, but it is less than a third the £14.85 levels of just a year ago.
The commercial turnaround strategy has been fashioned by CEO Jose Antonio Ramos Calamonte and it is designed to return the once-mighty online fashion group to sustainable profitability and cash generation in the second half of this year ‘and beyond’.
ASOS has also secured a new long-term £275 million financing facility alongside the fundraising, giving it extra flexibility.
But sceptics are already wondering if £75 million of new cash will be enough to ease debt worries. At half year results earlier in May, ASOS reported that net debt had ballooned from £62.6 million to an eye-popping £431.7 million.
UNCERTAIN TURNAROUND PROSPECTS
On 10 May, ASOS delivered disappointing figures across the board for the half ended 28 February 2023.
While Calamonte was pleased with ‘the strategic and rapid operational progress the business has made in the first half of the financial year, against some very challenging trading conditions’, ASOS’ losses widened to almost £300 million and the company reported continued weak trading in March and April.
Given ASOS’s ongoing restructuring and cost-saving initiatives, it had become increasingly apparent to the market that the Topshop, Topman and Miss Selfridge brands owner required an additional capital infusion to ensure its long-term viability.
WILL ASOS TAP THE MARKET AGAIN?
While the £75 million equity raise will come as a relief to ASOS shareholders, Shore Capital doesn’t believe the retailer will generate free cash flow (FCF) in the near future.
Coupled with a projected net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of 2.5 times for the year to August 2025, the broker warns it wouldn’t be surprised ‘if there arises a need for an additional equity raise, potentially resulting in further dilution.’
While Liberum Capital remains ‘wary’ of ASOS’s new strategy, the broker has upgraded its recommendation from ‘sell’ to ‘hold’ as the risk of an equity raise has now materialised.
It believes successful execution of the strategy could offer ‘material upside’, yet also warns that execution risk remains high and ‘there still remains a worst-case scenario that further financing may be needed to replace the £500 million convertibles in 2026. We therefore need more proof points before we turn positive.’
THE EXPERT VIEW
AJ Bell investment director Russ Mould said ASOS hopes the fundraising can create a solid base for recovery. However, with the company paying high rates of interest on its newly agreed debt, ‘much of the money raised from shareholders will almost immediately be going out the door on servicing its borrowings.’
Mould added: ‘The danger is ASOS hasn’t raised enough this time round, either through choice or necessity, and it will have to dig out the begging bowl again before too long. After all, the company is not generating free cash flow and the prospects of it doing so soon do not look too encouraging.
‘ASOS and other pure online plays did well during the pandemic as there was no alternative and people were less likely to make returns. That situation has now reversed leaving the company exposed to a difficult combination of rising costs and shrinking demand, as well as mounting competition.’
Mould continued: ‘And, longer-term, the whole idea of fast, disposable fashion may not fit with the attitude and ethos of a youthful demographic which are particularly sensitive to environmental issues.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Steven Frazer) own shares in AJ Bell.
LEARN ABOUT ASOS
