Shares in ASOS (LSE: ASC) were given a boost yesterday when the online fashion retailer reported a rise in sales of 17% for the year to 31 August. This helped to push its shares up to 10% higher yesterday, as investors viewed the improved top-line performance as a signal that the three profit warnings in the last year are now a thing of the past. And, looking ahead, the company’s new CEO is aiming to double sales to £2.5bn and treble pretax profit to £150m.
Clearly, these are ambitious aims – especially when ASOS posted a rise in pretax profit of just 1% last year. However, by focusing on core markets such as the UK, Europe and USA rather than in new markets such as China, ASOS believes that it has the potential to deliver improved financial performance. For example, in the next financial year its bottom line is expected to rise by as much as 23%.
While impressive, this rate of growth can be found elsewhere in the online fashion retail space. Sector peer Boohoo.com (LSE: BOO), for example, is due to deliver a rise in its bottom line of 47% in the current year, followed by growth of 27% next year. Both of these figures are higher than the comparatives for ASOS and, based on growth alone, Boohoo.Com appears to be a superior purchase at the present time.
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Furthermore, Boohoo.com only sells its own-brand items. This means that its products are unique and this allows it to more easily differentiate itself from rival retailers. ASOS, on the other hand, sells a wide range of branded goods alongside its own brands, which could mean there is reduced product differentiation versus Boohoo.com, with ASOS relying to a greater extent on price in order to generate sales. As such, ASOS may be more easily drawn into a price war with rivals while Boohoo.Com is more of a price maker than a price taker.
Despite having superior growth forecasts, Boohoo.com trades at a huge discount to ASOS. For example, it has a price to earnings (P/E) ratio of 32 while ASOS has a P/E ratio of 58. And, with Boohoo.com’s price to earnings growth (PEG) ratio being just 0.9 versus 2.3 for ASOS, it seems to offer more growth at a much fairer price than its rival.
Undoubtedly, both companies have the scope to significantly increase their top and bottom lines in future years. And, while the online fashion retail space is becoming increasingly competitive and crowded, they are two high quality operations with sound strategies and winning formulas. However, Boohoo.com has a wider economic moat via its focus on own-brand sales, offers superior prospects and is far cheaper than ASOS. Therefore, it seems to be worth selling ASOS and investing in its rival for the long term.
