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2 likely winners from retail’s reporting flurry

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Yesterday’s dreary trading update from high street clothing giant Next coupled with the recent news that retail footfall fell by 16% over the New Year weekend compared to 2016 provided yet more evidence that the future of retailing (particularly clothing) appears to be online.

This shouldn’t come as a surprise when you consider the astonishing popularity — and recent share price performance — of pureplay businesses such as AIM-listed Boohoo.Com (LSE: BOO) and ASOS (LSE: ASC). With both companies likely to report strong figures for the Christmas trading period next week, I expect the good times to continue in 2017.

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Online onslaught

A 275% rise in its share price since January of last year should tell you all you need to know about investor confidence in Manchester-based Boohoo. Now boasting a market cap of over £1.5bn, the company could comfortably sit in the FTSE 250 index if it so desired. 

In its most recent update, management suggested that the company was now expected to deliver revenue growth of between 38% and 42% in FY17. I’m optimistic that such superb figures will be attained, particularly as Boohoo should have profited from their 16-24 year-old target market’s desire for party clothing over the last month or so. 

If you think its ability to enter the FTSE 250 is impressive, that’s nothing compared to ASOS. With a market cap of £4.2bn, the company — whose shares once exchanged hands for just under 3p — is now so big that it would be approaching the threshold for entry into the FTSE 100 if it was listed on the main market. Like those with stock in Boohoo, holders of ASOS enjoyed a bumper 2016, with shares rising close to 62%. 

October’s full-year results showed an impressive 26% growth in group revenue with particularly strong performance from its US market. With profits before tax and exceptional items rising 37% (to almost £64m) and £173m in cash on its balance sheet, ASOS remains a class act. While more mature than Boohoo and offering lower returns on capital and operating margins, I can still see upside to the company’s shares even if next week’s numbers might not be quite as impressive as those of its online peer.

Where next?

If we assume the updates from these two will be very positive — or at least more positive than their more traditional retailing peers — the next question is whether further gains are likely over the medium term. Although future expectations will already be priced-in to some extent, I think those already invested should stick around.

As far is Boohoo is concerned, its astonishingly high price-to-earnings ratio (P/E) of 72 can be overlooked given the company’s clear plans for growth. While its (part) acquisition of PrettyLittleThing was expected, the company’s pursuit of the Nasty Gal brand and customer database is potentially even more exciting and, assuming the bid is successful, should continue to raise Boohoo’s profile in the US. The company is expected to report back on this in the very near future.

As far as ASOS is concerned, its most recent statement made reference to the company accelerating its investment in logistics and technology. While it might need to work harder to justify its similarly high P/E of 66, its determination to improve customer experience, double investment in its mobile offering and expand its European distribution network should continue to generate decent returns for shareholders.

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Paul Summers owns shares in boohoo.com. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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