- Firm is already among most-shorted UK stocks
- Shadowfall said to be betting on rights issue
- New ASOS chief executive faces uphill battle
Investors in online-only fast-fashion firm ASOS (ASC) are clearly made of stern stuff, or maybe they are just used to negative press reports.
The news that feared UK short-seller Shadowfall Research, nick-named ‘the dark destroyer’, had targeted the company barely made an impact on the shares, which were 2% lower at 768p in mid-morning trade.
QUESTIONS OVER FINANCING
According to trade journal Retail Gazette, the ‘struggling online retailer’ - which is the second most-shorted stock in the FTSE 250 mid-cap index with almost 11% of its outstanding shares on loan - has been targeted by Shadowfall on the basis of its short-term need for cash.
In October 2022, ASOS reported a 90% drop in pre-tax profits for the year to August as margins were squeezed by higher costs and an increase in product returns as customers struggled with the cost-of-living crisis.
New chief executive Jose Antonio Ramos Calamonte sought to calm investor fears over liquidity after it was reported a leading credit insurer had cut its cover.
The firm said it had renegotiated its banking covenants giving it £650 million of cash and credit facilities, while Ramos Calamonte vowed to reduce the capital intensity of the business caused by its rapid expansion overseas.
While Shadowfall has yet to publish its research on ASOS, reports suggest founder Matthew Earl has built a short position of at least £4 million on the basis the company will need to raise cash from shareholders via a discounted rights issue in order to finance itself without breaking its covenants.
Other UK firms targeted by the London-based short-seller include rival online fashion retailer Boohoo (BOO:AIM), property company Civitas Social Housing (CSH), media firm Future (FUTR) and international payments group Network International (NETW).
‘CORPORATE VULTURES CIRCLING’
‘It’s easy to see why corporate vultures are circling’, said AJ Bell investment director Russ Mould. ‘Chief executive Ramos Calamonte is desperately reducing inventory and slashing costs as he looks to stem the flow of cash which is bleeding out of the business.’
‘The company failed to fix the roof while the sun was shining. Online retail had a good thing going during the pandemic. People had lots of disposable income, there was nowhere else to buy clothes and the thought of braving a queue at the post office meant people were put off from making returns - which are such a costly part of doing business.
‘Now a lot of those factors have reversed, household budgets are tight, returns are easier to make and physical retail is now an option.
‘Management faces a real battle to get things back on track and an increasing number of observers are now betting against them.’
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DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Ian Conway) and the editor (Steven Frazer) own shares in AJ Bell.
