ASOS vs BOOHOO who got the best deal?

Some big moves on the High street recently with the purchase of Debenhams (as a brand = no stores/warehouses etc) for £55m by BooHoo and Topshop, Topman, Miss Selfridge and HIIT (a small brand within the Burton stable) for est. £265m by ASOS.

Debenhams had circa 125 stores in the UK whilst the other brands had around 300, whilst we’re talking nearly 200 globally and 500 respectively. In terms of staff we have an estimated 7,625 at Topshop and Debenhams employed around 12k. So a fundamental impact on the high street, and a huge impact on available employment for disproportionately young and female workers. So not great, really. On the other side you have two doyens of the modern UK fashion industry (although BooHoos crown has slipped a bit recently with allegations of modern day slavery in Leicester) looking to hoover up interesting brands and assets whilst also feeding the city some bumps in valuation (although neither have ever paid a dividend, natch!).

With this is in mind, who do I think got the best deal and what are the strategic implications? Many have written about this deal already and its only a week or so in. Mark Ritson is pretty clear that BooHoo will benefit most however; lets look closer…

I suppose the best place to start is the official statements.

John Lyttle (the ex Primark boss now CEO of BooHoo) said the following –

“The acquisition represents an exciting strategic opportunity to transform our target addressable market through the creation of an online marketplace that leverages Debenhams’ high brand awareness and traffic through the development of beauty and fashion partnerships connecting brands with consumers.”

Interestingly enough you used to be able to buy Debenhams brands on ASOS, i imagine this will stop. The key element here is that the ambition is to turn Debenhams into an online marketplace so more like Zalando than the ASOS e-tail front. This is an interesting move and whilst all the information is not available the suggestion is that the scale of the Debenhams brand is what enables this. This is where it becomes interesting. The number “300m visitors is thrown around” a lot but similarweb estimates around 180m per annum (not uniques of course) which is half what ASOS get and 70% what gets (the brand not the group) according to the same platform. This isn’t a great starting place i.e. its relatively small. Some will say “oh but you only need 1,100,000 to spend £50 a year and you’ve paid back”, yep thats true but thats still a lot. So headline level we’re already asking questions…

…Reviewing Debenhams published accounts prior to their purchase by a banking conglomerate (their accounts are filed in Jersey which makes anything later than 2018 impossible to see) gives us further insight.

Debenhams was a big retailer. It did nearly £3bn worth of revenue in 2016 and PBT (profit before tax) of £114m, however the trajectory was negative and in 2018 it was down to £2.2bn (-25% in two years) with only £35m PBT. At this point in time it was estimated that £530m was coming via the website (so 24%). In 2018 there was also a non-cash write down of c£500m. £300m of this was goodwill i.e. value of the brand and a few other things leaving a book value on the balance sheet of £500m plus there was a debt pile of £312m.

Now of course Boohoo haven’t bought all this, they’ve bought the brand and website (remember that £500m goodwill book value). However this data is 2 years old. If it had continued at the same trajectory with the same proportions then you could argue that the business is doing around £1bn revenue (factoring in Covid) of which maybe £300m – £400m via the website (generous although corroborated by a non-sourced article in the FT). This is where we can get a bit creative with analysis…

How have I got this figure? well Next deliver around 49% of income via online currently (although naturally that’ll has gone up to circa 60% + this year, suggestive that Debs has only done £600m this covid-year) and back in 2018 they did 46% (which is nearly double what Debs were doing at the same time) so i’m being very generous with the 30% – 40%. Also note that online does half the profit (see Next) that offline retail does (we’re back to how hard it is to do e-commerce) .

Back to that goodwill value on the balance sheet, Next currently put a book value of £40m on intangible assets. In 2018 debenhams had a £500m value against intangibles. Next was worth £4bn back then and Debenhams £2.2bn. Admittedly i’m not an accountant but something doesn’t really add up does it, especially as intangibles are usually amortised over 10 years or so. Why is this important? Because it’s an attempt to put a value on the “brand”. Intangibles usually include strategically important assets like trademarks, software or “goodwill” (an ephemeral cost associated with purchase price of assets) and often represent significant value over and above fixed operations and stock. Its worth noting that intangibles are usually amortised over a 5-10 year period on the balance sheet.

OK, so there are clearly some “unknowns” here.

Let’s delve a bit deeper, because ultimately purchase price isn’t the only cost that needs to be reviewed here. BooHoo have to turn Debenhams into something it’s currently not. An online market place. Assuming that current customers will just carry on visiting is a very poor assumption after all.

Admittedly for £55m and in the context of BooHoos cash pile, (£190m + £92m profit this year), it’s not going to put a huge dent but; it will still require significant investment to convert it into the type of marketplace that BooHoo envisage. The marketing approach that has been used in the past for the rest of the BooHoo brand stable won’t be appropriate here. I’d suggest that it needs to be BIG and broadcast and consistent (Next don’t do this because they have store presence, a clear strategy, excellent execution and don’t need resuscitating). I’m thinking £20m+ a year for starters, absolute minimum, in addition to the digital availability stuff that needs to be done to establish a marketplace (double or triple that on top = £40m) and thats £60m per annum.

For context remember that Debs last registered accounts suggested £2.2bn revenue with a £35m pbt. Estimates now put that at £600m (of which maybe half is online)… with a less profitable online operation.

A review of Boohoos accounts doesn’t give an exact insight into marketing costs but we do know its bundled with adminstrative costs which have grown by nearly £100m to £292m in 2020. The importance of marketing in driving growth through endorsement and social media is repeatedly mentioned throughout all Boohoos company reports so further educated guesswork would intuit a large proportion of these admin costs, especially as we’re talking about multiple brands. I’d guess that £80m is not out of the realms of possibility (just for comparison ASOS spent £120m on a single brand, globally, for a business some x3 the size but hey…)

There are a few more things to take into account and they are the category elephants in the room, Beauty and Homewear. These are huge potential prizes at stake (according to many commentators who seem to mistake offline retail with online seemingly). In beauty you have the The Hut group at this price point (doing £300m in the UK), the remaining department store (John Lewis, where it contributes significantly to profit margins) plus the emergence of players like Sainsburys edging in (i say edging but we’re talking 134 stores now). You also have a raft of unprofitable DTC brands that play in this sphere with very strong brands, hunting for a buyer.

From my perspective the immediate future/opportunity for this type of mass premium make-up market is grocery because with 87% of sales coming via traditional stores (weekly shop exposure to beauty is therefore heightened), its certainly not another marketplace. You’ve also got Boots Walgreens as a huge player (divesting of the pharmacy offering is an excellent move) who have the pure size to really dominate if they get the premium element sorted. Beauty is a category in flux, because of the reduction in barriers to entry and is atomising not aggregating, that said, atomisation causes confusion. Most people just want it easy and historically thats meant retail halls, something which (a small reminder) Debenhams won’t have. That means building out e-commerce capability and experience online, which as we know is not easy or cheap, adding further cost to the change. Beauty is not fast fashion.

The second elephant is Homewear, despite its profitability, a very difficult transfer to online only (its also not really a historical strength or area of importance to Debenhams as demonstrated by its aggregation as a depart with Fashion). The mid-low end of the market is already well catered for by IKEA, ARGOS, Dunelm and smaller players like delivering high quality design at reasonable pricing with decent fulfilment networks in place. Building out that sort of capability is very hard and again very different from dresses and jogging bottoms, even if Debenhams is a pure intermediary marketplace. Also why would you come to Debs here when you can get the products elsewhere and they are a single click away, what would the value proposition be without the presence of the physical stores?

BooHoo mention those well known brands like Principles (hey the 90’s called), Maine (yes 90’s Dad) and Mantaray (Who??) that they’ve also bought and that they will stock in the marketplace. Now don’t get me wrong but when Debenhams was doping its best work was during the “designers at debenhams” era. Nobody was specifically going “yep, the debenhams brand is ace, such hidden gems” it never had the M&S own-brand cache and it never had the BHS “Lighting” specialism either (did you know BHS still exist and they even have to pay for a 1st page google search mention so they’re obviously doing very well for an ex retailer going digital)

Even if product isn’t the ultimate aim this feels like a Johnny-cum-lately proposition. Next have a marketplace for other brands (worth £500m a year and growing at 20%+ a year) whilst The VERY group is exactly this and has been in doing it for a long time (with a highly profitable finance engine behind although admittedly some big financial problems beneath the surface). Do we need another? Is it worth it?. Are th Debenhams brand clothes that strong (and the 90’s cast-offs too) to drive visitation? especially if you can get the rest of the stuff elsewhere online. The recent move towards owned brand by department stores and owned distribution (Nike) is actually in the opposite direction. It’s also the opposite of Boohoos modus which is buying in brands to enhance its offering and extend its demography.

To aid contextual analysis its worth reviewing the old Debenhams strategy (as of 2019) which was to apparently turn shopping back into a social trip (they were in the process of dialling up all the experiential parts of the stores) and you have a lot of problems to overcome (note that post-covid its likely that we will see a return to this behaviour as people do their best to “go back”). If Debenhams was previously all about the social aspect then what happens if you go in the other direction?

I’m sounding very negative now but the other element worth considering is Mike Ashley offered a reported £125m in October. Mike owns 27% of debenhams (and had built up a £150m position that is now worthless). I appreciate that the golden quarter was awful for Debenhams the existence and reality of the £55m sale (admittedly without the back end) vs the x3 price offered 3 months earlier says everything about the financial performance of the business and the costs that were mounting for the owners.

Some of you will be aware of my work using Share of Search and i’ve previously analysed the department store market as follows i.e. its a good proxy –

©Vizer consulting

Note that Debenhams underperforms vs SoS (i.e. its actually bigger than you’d expect), the hypothesis is that its presence on High street is what has driven success i.e. physical availability is the strong business lever vs mental availability. However; that’s not the only point. A quick look at the current positions shows just how far Debs have fallen. The following shows Share of Search over time. M&S is a bit unusual because what you now get is a combination of GM and Food vs. pure GM a few years ago (this makes it slightly complicated when directly comparing).

© Vizer consulting

Reviewing this data in context we can see that Debenhams comes in at around 12% market share vs. these chosen competitors (this isn’t full market share obviously but its useful for benchmarking). We know that Next (c30%) have expected profit of 50% value vs last this year but in revenue terms its reasonable to expect a 40% drop for full year at £2.6bn. Applying that ratio to Debenhams reinforces the estimate that the business is (at best) barely a £1bn business (with the majority done at stores, not online, which are the biggest driver of usage) and supports the above rationale that Boohoo are going to struggle to revive the Debenhams brand, even as an online marketplace, without significant investment which puts a lie to the “cheap” nature of the acquisition.

To summarise, Boohoo have paid £55m for a brand that appears to be of little value from an operational perspective due to a web portal that is heavily reliant on its store footprint to drive usage and is also in traffic freefall. Simply put, take away the stores and does the Debenhams brand still exist meaningfully? The profit angle is also worth looking at here as online is significantly less profitable and whilst Debenhams were running to Gross margins of 11% in 2018 thats a world away from the 54.7% BooHoo currently report (this is definitely going down by the way). Add to this the costs required to actually doing all of this, the marketing and operations, and I would be very cautious as to whether the numbers actually stack up meaningfully in a reasonable period of time.

As i’ve been writing this I’ve tried to think of other brands that have done similar things and the two that sparks are the Very group (Shop direct back in the day) and Mike Ashleys Frasers group. From a Very perspective, they bought the Littlewoods brand in 2005ish, it was a catalogue biz up until 2012-13 when it shifted full web based and its done significant revenue (VERY is really about the finance offering though). They also bought Woolworths in 2009 but closed it in 2019. So two scenarios where a brand was bought (with zero retail) and used as a direct only “marketplace”/dept store. Did this work for them? Well 2013 saw Shop Direct deliver its first profit in 10 years so it took a long time and a lot of effort post brand investment to get them there and that was a pre-digital world with lower expectations on a direct business. Since 2013 the group has had a somewhat Yo-Yo financial performance, however 2020 has seen a covid driven profit vs 2019’s loss but; on the whole fairly inconclusive and the Littlewoods brand is officially being managed to invisibility due to strength of VERY as the core brand.

As to the Frasers group, and the House of Fraser purchase, delaying the publication of your accounts multiple times does not provide confidence and from a reporting perspective the numbers have been hidden in “Premium Lifestyle” which has seen growth, but also includes a number of brands. Looking at 2019 you can see that HoF was making a £50m loss on revenue of £300m (woah!!). So despite a few store closures its unlikely to be helping just now (another tick in the box for increased cost for BooHoo outside of the purchase price of Debs brand).

This post is getting on now and i haven’t even looked at ASOS and Topshop as of yet, however that part should be a lot easier. There are three reasons for this. Firstly, it’s a more obvious fit and secondly the amount of data available in the public domain is limited and thirdly its a simpler job i.e. they are not trying to create anything new. From ASOS’ perspective, they have recovered from the “blip’ a couple of years ago when their share price dropped due to warehouse fires and a rise in debt . The point here was that the debt was fuelling capital expenditures with a clear strategic goal to enhance distribution through the development of additional hubs ( most prominently in the US). This capital intensive push has subsided now and the business is cash rich and cash generative. You can see this in the following stats taken from their company reports –

ASOS all in £2017 201820192020
gross margin48.649.948.845.9
net cash position160m42m-15m407m

Its worth noting that the increased cash position in 2020 was supported by a c£200m cash boost which was essential in funding the £265m purchase of Topshop, Topman, Miss Selfridge and HIIT (a small subsidiary of Burtons).

Following a similar protocol as the Boohoo analysis the official statement is pretty telling as to expectations, with the brands settling in to become ASOS Brands, which delivered c£1bn in 2020. In 2018 Topshop/man did £800m worth of business whilst in 2020 evidence suggests that onsite Topshop sales on the ASOS platform grew 41%. The statement also mentions some £265m of annual revenue (this would be covid affected although the language is opaque even if essentially this suggests that ASOS have literally paid £1:£1 on revenue, worth thinking about that… buying a set of brands on a £1 to £1 revenue basis in a severely depressed year) Its also worth remembering that both Topshop and ASOS are international businesses with roughly half of both revenue outside the UK (this is in stark contrast the the more local pattern seen at Boohoo).

Taking this into consideration we have a simple logic flow on the value of the deal. Topshop was growing on ASOS at double digit levels. ALL that revenue & profit could taken in-house if it was bought and owned by ASOS (assume profit positive). 50% of total Topshop revenue is/was done outside the UK, this broadly matches ASOS and reinforces their international outlook. In a non-covid year and a VERY poor conversion figure of 40% online its reasonable to put a figure of £320m of potential digital revenue which will be directed to ASOS’ site with some quick SEO optimisations also it includes a significant proportion already on-site at ASOS (I’d imagine that AOS was a very important reseller for TopShop. This excludes the Miss Selfridge contribution which, whilst admittedly smaller (estimated £25m revenue pa max) provides additional £ into the deal of the £320m revenue vs £255m purchase price.

I’ll be honest here because much of this is “fag packet calculations” but they show the clear difference between the two deals i.e. one is “buying revenue” whilst the other is “buying costly potential”.

I told you it’d be a quicker piece of analysis but in conclusion the ASOS & Topshop deal is likely to be self-funding whilst the Boohoo & Debenhams deal requires significant investment to make it work (its not a simple port).

ASOS’ acquisition is also in-line with the business strategy (international expansion) whilst BooHoos is a step away (previously Boohoo have just acquired cheap fashion brands in a Mike Ashley style to extend their demographic mix) with a lot more risk inherent in the assets transformation.

This is a reminder that it’s not always about the headline figures with these deals, it’s what goes on behind. Topshop is a “going concern” in the way its been bought but Debenhams is a distressed asset that requires much work.

Strategy is choice. Risk is inherent in choice but analysis and synthesis suggest that one option is a lot riskier than the other. The ultimate upsides are comparable however. If i were a betting man, I would say that both would no longer meaningfully exist in 5 years. ASOS will have subsumed completely the TopShop brand and may even have moved into physical retail (its kept the flag ship on Oxford Street), whilst Debenhams will have gone the way of Woolworths, a loved brand that no-one really cared enough about to still shop there.