Fast fashion retailer Asos PLC may find itself in need of tens of millions of pounds from the market if its balance sheet doesn't see an improvement soon.
The possibility of a rights issue, or share placing, has become more apparent following the first half results, which failed to inspire confidence in some sections of the Square Mile.
The root of the problem stems from a worse-than-expected cash flow, which has left the business scrambling to catch up in the second half, according to Liberum, the City research house.
Forecasts adjusted
Its analysts had initially predicted a cash inflow of between £40mln and £50mln for the year, but they have now adjusted their forecasts to a cash outflow of around the tune of £125mln.
Despite this, Asos remains optimistic about achieving its full-year targets, which include a free cash inflow of £150mln and profitability in the second half.
However, one can understand why some commentators might view this as a challenging goal, considering the £263mln that left the business during the first half of Asos's financial year.
It should also be pointed out that the company’s targets hinge on the successful execution of its strategy, which involves selling more items at higher prices while keeping costs low.
However, given the current consumer climate, this strategy is not without its risks.
Customer pushback
A pushback from customers on higher prices will likely result in trading down to Primark or other cheaper retailers.
Asos may also be forced into discounting items, eating away at margins that CEO José Antonio Ramos Calamonte has pinned hopes of a turnaround on.
While the chances of an equity raise have increased on the back of today’s update, it is by no means guaranteed.
Asos extended its £350mln revolving credit facility to November next year, and there is also optimism that measures put in place as part of the turnaround plan, such as the stock write-off and supply chain efficiency, have provided the platform for second-half cash generation.
Guidance upbeat
Guidance is also upbeat, and, if taken at face value, would suggest at least in the short term, Asos would not need to turn to the market.
“I don’t feel like they’re going to be forced into a raise in the next six months,” said Peel Hunt analysts John Stevenson.
“The actions they put in place in the first half will turn around massive outflows so they’re going to be cash generative in the second half,” he said.
Stevenson notes that the situation could be different in three years’ time, at which point a £500mln convertible bond loan will mature.