Did you know that Asos and Sports Direct combined are now nearly as big as mighty Marks & Spencer in market cap terms?
The relative status of M&S has been declining for some time, but it’s still a bit of a shock to see how the retail hierarchy has changed and how other companies have overtaken or are overtaking it, according to the share price movements as reported in Retail Week.
Market capitalisation is certainly not the only measure of retail status. Not least as it is only one for quoted companies (so the likes of the John Lewis Partnership are excluded), but the stock market is a great weighing machine, remorselessly sifting through the relative prospects for earnings, dividend and cash flow growth to separate the winners from the losers in the great game of snakes and ladders.
As somebody once said, “form is temporary and class is permanent”, so temporary shifts in stockmarket sentiment don’t always mean that much in the scheme of things and the size of a retailer’s annual turnover is still an important fundamental consideration. But over time, “sales are vanity and profits are sanity” and it is M&S’s failure to grow its sales and maintain its profitability that is at the heart of its de-rating.
Four years ago, with its record £1bn pre-tax profit in 2007/08 rapidly fading into the distance, M&S was in decline, but it still had a market cap of £5bn and little ASOS was bumbling along with a market cap of less than £300m.
Four years on, M&S has actually recovered, partly perhaps thanks to bid rumours, and its market cap is over £7.4bn, but it has been overtaken by Kingfisher and Next, with Burberry not far behind, whilst, extraordinarily, the market cap of Asos is up to £3.6bn. Asos, of course, has been in the news this week, after the sudden departure of ex-M&S Buying Director Kate Bostock, but investors have been pretty unmoved by the news, focusing instead on its incredible top-line sales growth and global expansion as “the Amazon of fashion”.
Somewhat anomalously, Asos is still quoted on the junior AIM market in London, but if it had a full listing it would go straight into the prestigious FTSE 100 index. Sometimes these kind of massive valuation shifts can be stockmarket bubbles, as in the great tech bubble of 1999/2000, which saw Dixons’ quoted internet portal Freeserve valued at more than Dixons itself and also placed in the FTSE 100 index.
But this time around it feels different and the very high valuations of Asos (and Ocado) are telling us that the stockmarket thinks that a huge structural shift is taking place in the market, as online retailing takes off, at the expense of traditional bricks and mortar.
One retailer that is handling that multi-channel transition very well, however, is Sports Direct, banking both strong store LFL sales over the last year, as well as strong online sales. And a strongly incentivised management and store staff team therefore easily met its target of £270m underlying EBITDA in the year to April, as reported by the company today (with a strong start to the new-year putting the group well on its way already to its £310m target for this year).
After Sports Direct floated on the stockmarket in early 2007, there was a bizarre period when maverick Mike Ashley seemed to be wilfully trying to drive his own share price down and at this point 4 years ago the stockmarket capitalisation of Sports Direct was only around £475m, almost exactly the same as the market caps of Game Group and HMV (and look at what happened to them!).
Four years on, with its share price over 600p, Sports Direct is now capitalised at the same level as Asos, at about £3.6bn and, unlike Asos, it is eligible to go into the FTSE 100 index. In fact it has been on the reserve list for a while and, barring disasters, it should enter the FTSE 100 index on the next quarterly review in September. But for an unexpected £100m share sale by Mike Ashley himself at the end of February, it might have got in to the FTE 100 index on the March review, but it was not be. However, those investors who bought shares off him at 400p are sitting pretty.
Future success for Asos and Sports Direct is factored into their price, so they both have much to live up to in the near term, but in four years time, if they play their cards right, they are both likely to be bigger companies than Marks & Spencer in market cap terms.
About Nick Bubb
Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.