ASOS has established a joint venture with a subsidiary of Heartland, an investment and holding company with interests in a number of businesses including Bestseller, which will see the two acquire the Topshop and Topman brands in a 75:25 split in Heartland’s favour.
Asos said Heartland’s 75% stake is worth £135m ($177.69m). Asos Holding Limited will retain the 25% and the right to sell a further 5% interest to the Heartland Shareholder for £9m.
The £118m net cash consideration for Asos – which comes after fees, and pro-rata payment to Nordstrom International Limited ("Nordstrom") of its share of the consideration – will be used by Asos to strengthen its balance sheet.
Asos transitioned the brand into an online offering only. And, it had become one of its top performers.
However, analysts criticised Asos for not “doing much” with the brand. And this was impeding Asos’ growth overall, the brand recording a £10.7m amortisation cost as well as consultancy and restructuring costs of £31m, contributing to a loss of £296.7m for the FY23 period.
In FY23 Topshop and Topman generated c.£200m of adjusted revenue (c.5% of Asos' total revenue) with a c.50% gross profit margin through Asos.com and existing wholesale partners. In FY23, 40% of Topshop and Topman revenue was generated from the UK, 25% from the EU, 27% from the US and the remainder from the rest of the world. In FY24, the brands' revenue decline has been broadly in line with the Asos group.
Authentic Brands was reportedly in the running to acquire Topshop and Topman, and industry experts didn’t hate the idea of the US-based owner of Ted Baker and Forever 21 taking the brands off Asos’ hands.
Is a Heartland JV option for Topshop/Topman the right one?
Heartland is an investment and holding company representing the interests of the Holch Povlsen family, and their family business Bestseller. Heartland has invested in a diverse portfolio of companies including Asos, while Bestseller operates an extensive wholesale and retail business with more than £4bn sales across its channels including c.2,800 retail stores in over 30 countries.
The Joint Venture will grant Asos certain design and distribution rights for the TSTM brands in return for a royalty fee to enable it to continue marketing and selling the TSTM brands online. For FY25, the transaction is expected to have a £10-20m negative impact on EBITDA and to be increasingly EBITDA accretive over time.
The Asos board unanimously agreed the transaction is in the best interests of Asos shareholders as a whole, as well as customers because:
- The transaction ensures that ASOS customers will continue to benefit from access to Topshop and Topman products, alongside ASOS' £1bn+ revenue own brands business and c.900 partner brands
- The sale of a 75% stake in the Topshop and Topman brands aligns with ASOS' renewed focus on allocating capital more efficiently, thereby accelerating Asos' core Back to Fashion strategy
- As part of the Transaction, Asos intends to re-launch Topshop.com within six months of completion
- The new Joint Venture has the opportunity to expand Topshop and Topman's customer reach through selected wholesale partners - both online and offline - to bring customers globally the best that the brands have to offer
- The sale proceeds will significantly strengthen the company's balance sheet, while retaining a stake in the TSTM brands (through the Joint Venture) ensures that Asos can participate in the future growth potential of Topshop and Topman.
José Antonio Ramos Calamonte, CEO, Asos, said: “Topshop and Topman have made good progress since we acquired the brands in 2021. The new JV with Heartland is testament to the brands' potential and the partnership will help bring Topshop and Topman to more customers globally. Asos will continue to focus on what we do best - designing the best fashion and providing a destination for style. Through the Joint Venture, new opportunities, both online and offline, can be explored and we are excited to continue to be part of the brands' future while also realising the best value structure for Asos shareholders today."
While Lise Kaae, CEO, Heartland, said: "At Heartland, we are pleased to enter into this joint venture with Asos, bringing the best of the Topshop and Topman brands to customers globally, while supporting Asos' strategy to obtain a more efficient capital allocation. We are committed to and look forward to working closely with our partners in a strong alliance."
What the analysts say
The investor community has been largely favourable of the move.
Katie Cousins of Shore Capital pointed out that while the transaction value was substantially lower than Asos paid for the brands in 2021 and that it would harm FY25 EBITDA, it was “encouraging” to see Asos' Back to Fashion strategy progressing and allowing it to reduce its cost to serve and maintain profitability.
The concern is Asos continues to lose market share.
“Ultimately this reduces our confidence in the visibility and sustainability of the group. That being said the refinancing and JV announced this morning should provide some near-term cushions, and the group intends to provide an update on its strategy and guidance during its full-year results in the coming months.”
GlobalData senior apparel analyst Pippa Stephens believes Asos' decision provides provides potential for its "return to relevance".
She believes the brands have been "largely forgotten about by consumers" since they were acquired by Asos in 2021 due to the ranges getting lost among the thousands of products and other third-party brands available through the online pureplay.
However, she adds: "The relaunch of their own dedicated websites and increased accessibility through wholesale partners, both online and offline, should help to bolster their visibility and regain appeal."
Stephens is quick to point out Topshop and Topman were two of the most popular brands in the UK from the 1990s up until the late 2010s, however their desirability waned significantly in the last few years with Arcadia, and this has fallen even further under ASOS’ ownership.
She notes the challenge for Heartland will be bringing the brands back to life.
"Heartland also owns the Bestseller group, which holds brands such as Vero Moda and Jack & Jones, and has been experiencing consistent growth. Therefore, its fashion expertise makes it well placed to turn Topshop and Topman around, with more exciting designs and improved quality needed," she says.
Another key point from Stephens is that Asos has suffered from a loss of relevance with Gen Z shoppers preferring more affordable players like Shein and Cider, while its former millennial customers now find its designs too youthful, with some also trading up to premium brands that offer greater quality and value for money.
That being said, she highlights "the green shoots from its Back to Fashion strategy provides some hope, with the shorter lead times of its Test & React model, and greater breadth of products from Partner Fulfils, helping it more successfully compete within the saturated online market.”
Asos FY24 overview
Asos took the opportunity of this announcement to update on its FY24 performance.
It reiterated it has made “good progress” on its Back to Fashion strategy of bringing the best fashion and most inspirational experience to its 20-something fashion-loving customers and delivering sustainable, profitable growth.
For FY24, Asos expects adjusted EBITDA at the top end of consensus estimates, sales slightly below guidance, and all other guidance as set at FY23 year-end remains unchanged, subject to the impact of the transaction.
It said H2 saw continued progress on Back to Fashion strategic priorities to make Asos faster, more agile and more profitable.
It has improved speed to market with its Test & React initiative that brings product from design to site in less than three weeks and has reached its target for c.10% own-brand sales by end of FY24.
And it has reduced the cost to serve using AI technology, personalisation and improved imagery which has allowed an improved customer experience and reduced total and underlying returns rate year-on-year.
