Talk about social distancing. Asos is working overtime to stay aloof from its online rag trade rivals. Fast fashion has long been bedevilled by accusations of waste and exploitation. Aim-quoted Boohoo is combating allegations of sweatshop practices among suppliers in Leicester. Aim-quoted Asos, which also sells cheap togs for twenty quid to twenty somethings via its website, is doing its best to set itself apart.
Nick Beighton, chief executive, drove home his message about sustainability repeatedly on Wednesday: Asos looked after its suppliers, paid its employees properly, was mindful of waste and treated its workers “correctly”, he said. And while 98 per cent of Asos gear is made overseas, the group knows exactly where its products come from and who made them. Mr Beighton even went so far as to suggest that Asos would contemplate swapping its home on the junior market — often described as a wild west — for the main market.
Putting distance between it and the competition comes at a price, though. Asos expects to spend as much as £100m more than Boohoo next year on tech and infrastructure.
Last year, the company trimmed costs and held back on capex and marketing. That helped raise operating margins in the year to August to 4.6 per cent and pre-tax profits to £142m. The group hasn’t been as profitable since 2018, before it bogged up on stock levels around Black Friday last year. In 2019, the group made just £33m in pre-tax earnings.
Profits were also boosted by lower rates of returns. Asos reckons that added £45m to its bottom line. Strip that out and margins slip back to nearer 3.2 per cent.
Asos wants to be seen as a cut above Boohoo. Boohoo’s margins are twice as high, though. Perhaps that can’t be helped. Boohoo’s own-brand labels are intrinsically more profitable, even if its cost base is unsustainable. Zalando of Germany, which sells only third-party labels, makes margins sub 2 per cent. Asos which sells both is somewhere between.
Asos reckons its operating margins will rise to an enduring 6 to 8 per cent once it has stopped investing in growth and acquiring customers. That is in the very distant future. In the meantime, the shares have run up and investors are now paying well over 40 times next year’s earnings forecasts. Given the uncertain outlook for consumer spending, that is a high price. But perhaps not too much if the group can sustain its lead for the next few decades.
Bunzl bounce
Bunzl is the kind of steady-Eddie company that has cranked out growth for years by selling businesses the bits and bobs — everything from coffee stirrers to cleaning products — that keep them going, writes Cat Rutter Pooley. Its shares were steady enough too, climbing consistently from 2009 to 2016.
Then Bunzl seemed to bungle it. The roll-up group has long been reliant on acquisitions to keep the engines of growth going, and it hasn’t overpaid. But organic growth in 2019 was only 0.3 per cent. A year went by without much M&A. The shares fell almost a quarter between May last year and the start of March.
The pandemic has changed all that. Bunzl is back to share price growth. But it’s morphed from steady to speedy Eddie. Shares have more than doubled since March, making it the 11th best performer in the FTSE 100 so far this year.
Bunzl’s straightforwardness is a blessing during a period of high uncertainty. The reason for its share price surge is pretty straightforward too. It makes masks, sanitisers, gloves and disinfectants. Sales of its top eight coronavirus products more than made up for a 9.5 per cent year-on-year decline in the rest of the business during the third quarter. Underlying revenues rose 8 per cent overall. It now trades at a multiple of around 20 times next year’s forecast earnings, above the 17 times average of the past 10 years.
To earn that sort of multiple, Bunzl has to show that something’s changed. The outlook for acquisitions, the company’s bedrock, is promising. Boss Frank van Zanten sold his family business to Bunzl 26 years ago. There will be plenty more like him after a period of tough trading. Jefferies reckons Bunzl has about £1bn in surplus capital it could spend.
But that still leaves questions about other sources of growth. There could be permanently higher demand for things such as face masks and sanitiser, which would be particularly helpful if as own-brand items they yield higher margins. But that won’t be enough to keep growth going year after year.
Bunzl’s bits and bobs aren’t usually the sort of thing that get people excited. Coronavirus has turned everything on its head. Bunzl should return to the steady stock it has been before. When normality is restored, investors will realise they shouldn’t have gone quite so bonkers for Bunzl.
Asos: kate.burgess@ft.com
Bunzl: cat.rutterpooley@ft.com