How people buy their clothes has changed vastly in recent years, with online becoming increasingly popular due to its convenience, choice and ease of use. As a result, online fashion retailers such as ASOS (LSE: ASC) and N Brown (LSE: BWNG) have enjoyed a considerable amount of success, with their lack of store footprint (or only small number of stores in N Brown’s case) helping them to keep costs to a minimum and maintain relatively high margins.
On the flip side, traditional retailers such as Debenhams (LSE: DEB) and Sports Direct (LSE: SPD) have enjoyed mixed success in recent years. Although they also have a significant online presence, they continue to have relatively large estates and, looking ahead, may find it more difficult to compete with online retailers due to their higher costs.
So, should you ditch the likes of Debenhams and Sports Direct in favour of online retailers such as ASOS and N Brown? Or, do traditional retailers offer better investment prospects than online-focused companies?
Valuations
As mentioned, Sports Direct and Debenhams have performed very differently in recent years, with the former going from strength to strength as shoppers have become more price conscious, while Debenhams has seen its shoppers desert it for cheaper alternatives as the credit crunch has squeezed disposable incomes. As such, Debenhams now trades on a very appealing price to earnings (P/E) ratio of 10.7, while Sports Direct has a P/E ratio of 17.3.
However, Sports Direct has much stronger growth prospects than Debenhams which, when combined with its rating, equates to a price to earnings growth (PEG) ratio of just 0.9. As such, Debenhams and Sports Direct offer good value for money at the present time, with their bottom lines set to grow by at least as much as the wider index next year.
Meanwhile, ASOS is expected to increase its earnings in 2016 for the first time since 2012, with its bottom line forecast to rise by 26% next year. This is great news for its investors and shows that its investment in pricing outside of the UK is making a real impact on its competitive position and, in time, is likely to be a strong growth area for the business. However, much of this future potential appears to be priced in, with ASOS trading on a rather unappealing PEG ratio of 2.9.
And, in the case of N Brown, it trades on a PEG ratio of 1.1 and is expected to bounce back from disappointment last year to post earnings growth of 7% in the current year, and 11% next year. As such, its shares seem to be attractively priced at the present time, having fallen by 35% in the last year.
Looking Ahead
While ASOS does have considerable future potential, its current valuation makes it difficult to justify as an investment. Even if it does deliver strong growth over the medium to long term, much of this potential appears to be priced in. The same, though, cannot be said of N Brown, which continues to offer a diverse range of brands/websites and sound finances, as well as an appealing growth profile and valuation. The same is true of Debenhams and Sports Direct which, while somewhat behind their two sector peers in terms of their exposure to online retailing could yet prove to be better investments owing to their bright outlooks and very appealing valuations.
So, while online retailing is undoubtedly set to be a major growth area, traditional retailers remain very enticing investments. They appear to offer growth at a reasonable price and, as such, Debenhams and Sports Direct are better buys than ASOS and N Brown at the present time.
