M4 BARRON’S March1,2021
EUROPEAN TRADER
S
hares in U.K. online fashion and
cosmetics giantAsosfell 7.1% in
the final three months of 2020, to
45.78 pounds sterling ($62.70),
over fears that earnings would take a hit
from a slump in demand for its signature
partywear collections.
Instead, Asos, which sells 85,000
products from top brands and its own
collections, benefited from being the on-
line destination for shoppers who have
been stuck at home during the pandemic.
Consumers switched to purchasing more
casual wear, sports gear, and beauty
products in an attempt to improve their
appearance on video calls.
Sales at the London-based company
(ticker: ASC.UK) jumped 23% over the
final four months of 2020. The stock has
since recovered to £57.78, and is up 18%
this year.
Granted, there’s still a danger that
shoppers will flock to bricks-and-mortar
stores when the Covid-19 crisis subsides.
But the inventory levels at Asos remain
healthy, while store-based rivals might
have to play catch-up in terms of ordering
or replenishing products.
Asos has been one of the U.K.’s fastest-
growing retailers, and the pace looks set
to continue. The company has carved out
a niche catering to the fashion-conscious
20-something market, and has state-of-
the-art fulfillment centers in the U.K.,
U.S., and Germany.
There are plans for further interna-
tional expansion, with a new distribution
hub in the U.K. and the addition of robot-
ics at its site in Atlanta, Ga. In February,
Asos bought the popular apparel brands
Topshop, Topman, Miss Selfridge, and
HIIT for $405 million, and will be closing
stores.
Michael Benedict, an analyst at Beren-
berg, has forecast that the stock could
rise 17.7%, to £68. “Asos’s strongest-ever
balance sheet looks to have left it well
positioned to capitalize immediately upon
any lifting of lockdown restrictions,” he
wrote in a note, adding that the com-
pany’s international warehouses will
help drive “significant global growth.”
Anne Critchlow, an analyst at Société
Générale, is targeting an even higher
share price, at £70. Covid has boosted the
online apparel market, she said in a note,
“which we see only partially reversing
when physical stores reopen, leaving the
online retailers with some scale-related
permanent margin gains.”
Asos has a market value of £5.6 bil-
lion, employs 3,824 people, and has 23
million active customers—which means
they make purchases. The company has a
multiple of 33.3 times this year’s expected
earnings and is valued at a discount to its
peers. Pretax profit was £142 million for
the year ended Aug. 31, 2020, a substan-
tial increase from £33.1 million the previ-
ous year. It had sales of £3.2 billion.
Chief Executive Officer Nick Beighton
toldBarron’sin a statement, “We are very
excited about the opportunities ahead as
we continue to deliver our multibrand
platform strategy.”
The business started in 2000 selling
clothing that mimicked items worn by
celebrities on television and in movies—
the derivation of its original name, As
Seen On Screen. It floated on the London
market a year later, and a year after that
changed its name to Asos, shifting its
strategy to selling its own clothing collec-
tions and top brands.
“Asos clearly has confidence in its fu-
ture,” Chloe Collins, an analyst at re-
search firm Global Data, wrote in a note,
pointing to the announcement last week
that Asos invested £90 million in a
fourth fulfillment center in the U.K., cre-
ating 2,000 jobs.
“This will allow Asos to continue its
growth trajectory without compromising
on its delivery speed and efficiency,
which contribute so much to its success,”
she said.B
By Rupert Steiner
EMERGING MARKETS
Brazil Needs Bolsonaro
To Stay on the Sidelines
B
razilian assets were already fac-
ing a tough start to 2021.
The second Covid-19 wave
that hit globally late last year is
still cresting in the nation of 213 million,
with cases at a record high. The cash pay-
ments, or coronavouchers, that sup-
ported much of the population through
the pandemic expired last month. Politi-
cians face the unenviable task of slashing
them now or smashing a spending ceiling
that keeps debt levels and a chronically
weak currency within bounds.
Now President Jair Bolsonaro has
started his re-election campaign a year
early. That’s what investors fear, at any
rate, since the self-styled “Trump of the
Tropics” fired the CEO of state oil com-
panyPetroleo Brasileiro(ticker: PBR)
on Feb. 19. TheiShares MSCI Brazil
exchange-traded fund (EWZ), which al-
ready skipped the early-year emerging
markets rally, is down more than 7%
since then.
Petrobras, as the company is known, is
not such a big deal in itself—about 5% of
the equities index. Brazil watchers worry
it will set a pattern. The deposed boss’ sin
was raising fuel prices in line with crude
oil, never a popular development.
If Bolsonaro, who faces voters in Octo-
ber 2022, plays to the crowd during the
pending fiscal debate, consequences
would be more serious. “Bolsonaro’s de-
cision to replace Petrobras’ CEO is dash-
ing hopes of Brazil’s return to economic
orthodoxy,” analysts at BCA Research
conclude.
Optimism about Brazil has hinged on
the assumption that Bolsonaro would
stick to his pet social issues and leave
economic policy to finance minister
Paulo Guedes, a University of Chicago
Ph.D. adored by the markets. That
worked in 2019: Guedes steered a long-
delayed pension overhaul through the
country’s cumbersome Congress.
Hope bloomed for more reform this
year as both legislative chambers chose
Guedes-friendly leaders in January. The
lower house passed a bill on central bank
independence, a key liberal goal. But Bol-
sonaro, whose popularity surged with the
coronavoucher largesse last year, may not
keep to the sidelines again.
“Bolsonaro has discovered the wonder
of social-support payments,” says Thiago
de Aragao, who follows Brazil at the Cen-
ter for Strategic and International Stud-
ies.
That’s making investors cautious de-
spite some tempting valuations in the
Latin American giant. “Markets already
lacked willingness to trust in sufficient
fiscal reforms,” says Aaron Hurd, senior
currency portfolio manager at State
Street Global Advisors. “Now we see Bol-
sonaro is not working hand in hand with
the finance minister.”
A more optimistic view comes from
Malcolm Dorson, Latin America portfolio
manager at Mirae Asset Global Invest-
ments. Things may be tough in Brazil,
but not tough enough to justify a 30%
drop over the past year in shares of its
two biggest private banks,Itau Banco
Holding(ITUB) andBanco Bradesco
(BBD).
“Nonperforming loans are lower than
expected, so you should see earnings
coming up quickly,” he predicts. Dorson
also expects some good macro news, as
Congress passes a reasonable spending
package in March and the underrated
public-health service ramps up Covid
vaccinations.
De Aragao anticipates a mix of positive
and negative Brazil headlines this year.
Congress could still surprise on the up-
side with a tax reform bill, but will strug-
gle to thread the fiscal needle as the pan-
demic drags on, he predicts.
“It’s rare in Brazil that something ei-
ther terrible or terrific happens,” he says.
That muddle-through won’t be enough
to get markets excited.B
By Craig Mellow
Online Retailer Asos Is
Staying Ahead of Trends