ASOS raises u00a375 million for turnaround and balance sheet fix, but will it be sufficient?
Summary
The one-time stock market darling confirmed it has raised \xa375 million through a share placing priced at 418.1p in order to support its Driving Change agenda and bolster the balance sheet.That placing price is bang on yesterdays (25 May) close, but it is less than a third the \xa314.85 levels of just a year ago.The commercial turnaround strategy has been fashioned by CEO Jose Antonio Ramos Calamonte and it is designed to return the once-mighty online fashion group to sustainable profitability and cash generation in the second half of this year and beyond.ASOS has also secured a new long-term \xa3275 million financing facility alongside the fundraising, giving it extra flexibility.But sceptics are already wondering if \xa375 million of new cash will be enough to ease debt worries. At half year results earlier in May, ASOS reported that net debt had ballooned from \xa362.6 million to an eye-popping \xa3431.7 million.On 10 May, ASOS delivered disappointing figures across the board for the half ended 28 February 2023.While Calamonte was pleased with the strategic and rapid operational progress the business has made in the first half of the financial year, against some very challenging trading conditions, ASOS losses widened to almost \xa3300 million and the company reported continued weak trading in March and April.Given ASOSs ongoing restructuring and cost-saving initiatives, it had become increasingly apparent to the market that the Topshop, Topman and Miss Selfridge brands owner required an additional capital infusion to ensure its long-term viability.WILL ASOS TAP THE MARKET AGAIN?While the \xa375 million equity raise will come as a relief to ASOS shareholders, Shore Capital doesnt believe the retailer will generate free cash flow (FCF) in the near future.Coupled with a projected net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of 2.5 times for the year to August 2025, the broker warns it wouldnt be surprised if there arises a need for an additional equity raise, potentially resulting in further dilution.While Liberum Capital remains wary of ASOSs new strategy, the broker has upgraded its recommendation from sell to hold as the risk of an equity raise has now materialised.It believes successful execution of the strategy could offer material upside, yet also warns that execution risk remains high and there still remains a worst-case scenario that further financing may be needed to replace the \xa3500 million convertibles in 2026. We therefore need more proof points before we turn positive.AJ Bell investment director Russ Mould said ASOS hopes the fundraising can create a solid base for recovery. After all, the company is not generating free cash flow and the prospects of it doing so soon do not look too encouraging.ASOS and other pure online plays did well during the pandemic as there was no alternative and people were less likely to make returns. That situation has now reversed leaving the company exposed to a difficult combination of rising costs and shrinking demand, as well as mounting competition.Mould continued: And, longer-term, the whole idea of fast, disposable fashion may not fit with the attitude and ethos of a youthful demographic which are particularly sensitive to environmental issues.Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine.