To assess how well the UK stock market is doing, analysts typically measure the performance of its key index, the FTSE 100.
Sure, it lags slightly behind the famous S&P 500, but at 58.5%, it’s not bad.
Unfortunately, not every listing on the index has been doing so well. Some have fallen off it completely, as happened to online fashion retailer ASOS (LSE: ASC) in June 2023.
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Now listed on the mid-cap FTSE 250 index, the stock is down 72% in the past five years. Despite an initial surge in popularity bolstered by a promising business model, the company has failed to stay relevant.
Now, it’s becoming increasingly likely that it may become a takeover target in the near future.
What does this mean for investors?
Fast fashion
Founded in 2000 as ‘AsSeenOnScreen,’ the company initially sold clothing and accessories inspired by Hollywood celebrities. It later rebranded to ASOS and doubled down on the fast fashion model as it worked to compete with then-mainly-store-based businesses like Zara-owner Inditex and H&M. It now sells to over 200 countries worldwide, with key markets being the UK, US and Australia.
Using an online-only business model, the theory was that fast fashion retailers could rapidly produce and sell clothes at lower cost. But e-tail has high delivery costs and the huge volume of returns also weighs on profits.
And more recently, the model has been adopted by low-cost Chinese labels like Shein, presenting significant competition to ASOS. The model has also been heavily criticised for its environmental impact, leading to a rise in the popularity of resale sites.
What will happen to ASOS?
As takeover rumours swell, ASOS’s large single shareholder Anders Povlsen and his family have increased their shares in the company and Frasers Group has also increased its position.
Share prices typically surge following a successful takeover bid, so do they know something we don’t?
There’s also rumours the company could merge with German peer Zalando. And I’d be surprised if Primark owner Associated British Foods didn’t show interest in the coming months.
But ASOS isn’t alone.
Debenhams owner Boohoo Group has also been tipped as a potential takeover target. Recently, it received pushback from its largest shareholder Frasers after changing its name to Debenhams. The fashion firm has also struggled to compete with low-cost rivals, with the shares down 85% in five years.
On the right track
Despite declining sales, ASOS seems to be turning things around. The price surged almost 30% in March after it posted positive first half results. Cost-cutting exercises combined with reduced discount activity led to a “significant improvement” in profitability.
The successful implementation of a ‘Test & React’ approach may be helping. This involves producing small batches of new designs and scaling up production based on customer response.
The boost helped it briefly bounce back above 300p — a price level it hasn’t traded under since 2009. Sadly, it didn’t last, with the stock currently trading around 285p.
After three years of being unprofitable, I’m not convinced this small win will be enough to save the company.
If a takeover bid is successful, it might make some impressive short-term gains. But as an investor with a long-term mindset, I wouldn’t consider the stock right now.
