It’s a fickle business to invest in, the rag trade, and the fortunes of three of the UK’s favourite fashion stocks show how differently things can turn out.
On the one hand, we have high-street supremo NEXT (LSE: NXT) and upmarket designer Burberry (LSE: BRBY)(NASDAQOTH: BURBY.US) both hitting new 52-week highs, and on the other there’s online retailer ASOS (LSE: ASC)(NASDAQOTH: ASOMF.US) sitting on a 12-month fall of 51%.
NEXT shares have been on a climb since mid-December, taking the price up 13% over 12 months to a closing high of 7,370p on Thursday. That leaves them on a forward P/E of 18 based on expectations for the year ended January 2015, but two more years of forecast growth would take that down to a little under 16 in two years time. That still perhaps looks a bit toppy, but quality companies can command high valuations for lengthy periods.
Burberry shareholders have had an even better year, with a 25% gain over 12 months to Thursday’s record of 1,913p — although over five years the positions are reversed, with Burberry up 204% against NEXT’s 293%.
Valuations are quite different, too, with Burberry shares afforded a P/E of 25 on forecasts for March 2015, dropping only as far as 20 by 2017. There’s a fair bit of future growth built into the current price, and Burberry might be capable of justifying it — but at these levels even the slightest disappointment could send the price down sharply.
Then we come to ASOS, whose shares were trading for more than £70 at the start of 2014 before slumping to a low of just £17.42 by October. Of late there’s been a bit of a recovery, and the price has almost doubled from that depressed point to £32.48 as I write — for many a doubling in such a short period would be great news, but heart-stopping swings like this are standard fare for ASOS investors.
But it’s when we look at the firm’s P/E that our eyes really start watering. After two years of crashing earnings and a further 6% fall forecast for the year to August 2015, we’re still looking at a multiple of 79! There’s an earnings recovery pencilled in for 2016, but that would still drop the ratio only to 62 — we’d need earnings to more than quadruple to get the P/E down to the market average of 14 at today’s share price.
Time to buy?
Should we buy any of these now? Well, I reckon the whole business is looking overheated, and the only one of these I’d consider is NEXT — but even then I think there are better bargains out there.
As for ASOS, with the growth needed to justify today’s valuation, and the competitive shocks a business with such razor-thin margins can face, I reckon it’s a pure gamble — and I don’t do that.