ASOS Moves to FTSE: Time for a Rebound?

UK's online fashion retailer Asos intends to switch from AIM to the LSE after 20 years of being publicly traded. The opportunity to attract more investors and fund managers could boost the stock.

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Coming back into fashion
One week ago, Asos announced that it intended to apply for admission to the premium segment of the Official List and cancel trading on AIM. Most likely, this would take effect at the end of February. Given its market cap and valuation, that would mean it would probably be added to the FTSE 250 at the next review in June.

A change in the index would be expected to have a two-way impact, affecting the index and the added company. There is a tendency for companies moving into a bigger index to benefit from new institutional investors who might have been restricted from investing in the smaller index.

Looking for stability and reputation
Retail stocks have been on a roller-coaster because of covid, with changes in government rules becoming an unfortunate driver of their economic success. Asos hasn't been immune. First, it benefited from people staying home and ordering online, but now it's facing supply chain problems and rising costs. The increased competition for online sales makes it harder to pass on increased operating costs to consumers.

While the potential from an increased pool of investors might be a good reason to list, there is the remaining issue of transparency – particularly around overseas supply chains - that have plagued UK fashion retailers. In the case of ASOS, the official listing would imply stricter controls and might help the brand recover its public image.

Short-term growth hangs on efficiency
Asos forecast an annual sales increase of 15-%20% at its 'capital markets day' and has since reiterated that stance in its latest trading statement. However, the fate of retailers for the short term is most likely related to how the omicron wave plays out. With the UK removing many restrictions (for the time being), people could be moving back to their old habits. Growth in the online segment for retail could be held back in the short term.

In that scenario, ASOS has some growth potential if they focus on efficiency. UK EBIT margins are 7%, but in Europe, just 2% due to the covid fourth wave. Worse in the US with -6%. The US market might be the key for Asos' growth if they can get their margins under control and expand in a much bigger market.

ASOS share price analysis
Despite trading more than 2/3rds lower from its most recent peak, the ASOS share price lies 135% above the covid crash. The price popped on the FSTE announcement when shares were changing hands at 2259p, but the initial excitement was short-lived. 3000p is the pivotal resistance, which needs to break to demonstrate momentum from the new listing.

Takeaways
The opportunity remains for a "buy the news sell the event" trade ahead of the FTSE listing but the general operating environment for ASOS – namely around covid restrictions, supply chain constraints, cost increases and increased competition since the pandemic - is a headwind.