ASOS eyes strong returns from Arcadia deal and Ryanair heads for record loss

“The FTSE 100 attempted a rebound, starting the week on a positive note after the worst five days of trading since October,” says AJ Bell Investment Director Russ Mould.

“Positive data from China’s manufacturing sector helped lift stocks in Asia and the FTSE seems to have latched onto that good feeling.

“Whether this rally will be maintained or fizzle out like previous attempts to recover ground in recent weeks remains to be seen and may depend on how US stocks start on Monday afternoon.

“The Redditors who helped heavily shorted stocks soar on Wall Street over the last week or so now appear to have turned their attention to the silver price which is at a discount to the level at which it typically trades relative to gold – the latter still bubbling away just under the $1,900 level.

“Corporate earnings may help give some shape to the week with Amazon and Alphabet reporting across the Atlantic and focus on the likes of BP and GlaxoSmithKline closer to home.”

ASOS

“After much speculation, ASOS has won the prized assets from the fallen kingdom of Arcadia. This looks like a decent deal and one that gives ASOS the ability to earn higher margins from clothes that it was already selling through its platform under a previous partnership deal.

“Approximately 60% of ASOS’s sales come from third party brands as it aims to offer customers a wide range of choice and stop them going elsewhere to buy clothes. By owning the Arcadia assets rather just being a wholesale platform, it will have more control over supply chains and an opportunity to increase their reach, such as pushing the brands in the US via department store partner Nordstrom.

“It is important to stress that this is not a transformational acquisition, and that’s a good thing. ASOS isn’t buying another retail business where culture clash, integration problems and skeletons in the closest are generally the key risks to overcome. Instead, it is slotting established brands into its existing infrastructure and proven way of doing business, albeit with guidance to make some very attractive returns on investment.

“The downside of ASOS’s actions is the large number of people working for Arcadia who will now become unemployed as stores are shut. It is only keeping approximately 300 staff, which is only a fraction of the number who worked for the brands being acquired.

“It means the high street is left with even more vacant stores, and names strong enough to keep standing, such as Zara and H&M, are left in an even stronger position as competition is further reduced for those people who still prefer to go into a store to buy, or at least browse, clothes.”

Ryanair

“It says something about the market’s willingness to look through the pandemic and just how low current expectations for the airline sector are pitched that a forecast record annual loss from Ryanair is being treated so calmly.

“This isn’t just a small beat of the previous record either, this is the sort of record breaking even Usain Bolt would envy – with the guidance implying a five times larger loss than the previous worst in 2009.

“One reason Ryanair is being given the benefit of the doubt is its large cash balance, low costs, avoidance of the long-haul market and the fact it doesn’t offer business class. Business travel looks unlikely to recover rapidly.

“This could put Ryanair in a strong position relative to its rivals and allow it to take market share coming out of the Covid crisis.

“Ryanair still needs to navigate the current turbulence first and guidance for a return to ‘some kind of normality’ by this winter might be optimistic given divergent experiences with the pandemic and with the rollout of vaccines.

“This could knock a hoped-for recovery over the summer off course and explains why the company is urging the EU to step up its inoculation programme.”

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