Online fashion giant ASOS (LSE: ASC) fell by 10% this morning, despite the firm reporting a 27% rise in sales for the six months to 28 February.
This sinking feeling will be familiar to shareholders of rival Boohoo.com (LSE: BOO). The Boohoo share price has fallen by 40% since the end of September.
In my view both companies are still excellent growth businesses. I think what’s happened is that their valuations have risen too far, too fast. Today I’ll explain why I’d still rate both stocks as a buy at the right price.
ASOS is still on trend
Today’s figures suggest that ASOS is continuing to tap into strong demand from fashion fans. Sales rose by 27% to £1,158.1m during the half year to 28 February, helped by international sales, which rose by 31% to £716.8m.
Overseas sales accounted for 62% of all revenue during the first half and the company is continuing to invest in its international operations. Phase two of the group’s European hub is “progressing well” and ASOS’s US hub is set to open early. When complete, the company will have the infrastructure needed to support annual sales of £4bn, 80% above current levels.
In the short term, this investment is weighing on profits. Although sales rose by 27% during H1, pre-tax profits only rose by 10% to £29.9m. However, the group’s gross profit margin rose by 0.9% to 49.2%, suggesting that the company’s pricing power remains stable.
The right time to buy
Broker consensus forecasts suggest that sales will rise by 28% to £2,472m this year, while adjusted earnings will increase by 27% to 97.2p per share.
The share price at the time of writing is £64. Using this as a guide, these forecasts put the stock on a forecast P/E of 65 and give the stock a price/earnings growth (PEG) ratio of 3.1. This is well above the PEG ratio benchmark of 1 that’s often used to identify cheap growth stocks.
I believe ASOS remains a potential growth buy, but the shares look too expensive to me at current levels.
BOO could be a better buy
Boohoo.com is also spending more on marketing and expanding facilities. This may be one reason why the shares have fallen heavily over the last six months, despite rising sales forecasts.
The group expects to report sales growth of “around 90%” for the year to 28 February. This guidance started out at 50% one year ago, but has since been increased several times. This suggests that sales may be rising even faster than management expects.
Higher spending means that earnings growth is expected to be more modest, at about 27%. Although this might disappoint some investors, I believe such strong sales growth should drive future profits.
2 more reasons why I’d buy
Boohoo’s operating profit margin of 8.4% is more than double the ASOS figure of 3.8%. If this can be maintained, I’d expect stronger cash generation over time.
I’m also impressed by the firm’s ability to sell several brands. The addition of Nasty Gal and PrettyLittleThing over the last couple of years has helped to maintain faster sales growth than the Boohoo brand alone could provide. I don’t see any reason why this model can’t continue to work.
Trading on 43 times 2019 earnings, Boohoo isn’t cheap by conventional measures. But I think the stock could perform well over the next few years.
