Why I’d buy Boohoo and shun ASOS

Boohoo plc (LON: BOO) is powering ahead, winning market share and executing well along the way.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Comparing the share price charts for online clothing fashion retailers ASOS (LSE: ASC) and Boohoo (LSE: BOO) could lead you to pick ASOS as a potential investment because the shares have fallen back from earlier highs. But I wouldn’t. I’d go for Boohoo because I think it runs a better business.

Operational slip-ups

Last week’s full-year results report from ASOS revealed to us that revenue continued to grow during the year but earnings collapsed. The company explained in the report that the “huge” investment it made in an effort to prepare the business for scaling up operations in the EU and the US “has been more challenging than we foresaw.”

The firm owns up to having “underestimated” the effects of large-scale operational change being executed on two continents at the same time. The company was not prepared, it said, “for the additional complexities of planning and trading across our expanded warehouse footprint.”

It seems the company dropped the ball regarding “product, presentation, and customer engagement.” In other words, it stopped getting the basics right, which caused profits to vanish.

Looking ahead, ASOS is confident it has identified its problems and can sort them out going forward. Great! Perhaps this is a case of short-term problems knocking a share price back and opening up a buying opportunity for investors. Maybe. But I’m not keen on the firm in the first place.

A clear winner on profitability

Even looking back to before the recent operating problems, ASOS only achieved an operating margin of around 4.2% in the trading year to August 2018. That compares to Boohoo’s operating margin, which is running close to 7%. It’s clear that Boohoo is able to squeeze more profits from turnover than ASOS can.

Meanwhile, City analysts following both firms expect earnings to start to recover for ASOS, but in the current trading year, they expect a shortfall compared to the year to August 2018. But with Boohoo, they are predicting robust double-digit percentage advances in earnings this year and next year with profits breaking into higher ground year on year.

In September’s interim results report, Boohoo’s chief executive John Lyttle said the firm is well-placed and confident” that its platform will deliver further market share gains because it combines “the latest fashion, great prices, and excellent customer service” with a well-invested infrastructure.

That strikes me as being almost exactly the same basics of the business that ASOS has been messing up recently.

Vibrant Boohoo

Boohoo is powering ahead, winning market share and executing well along the way. There’s no sign of the kind of growing pains that ASOS has been experiencing and it seems to me that Boohoo is generally the most vibrant business of the two.

Meanwhile, with the share price near 3,081p, you can pick up some ASOS shares on a forward-looking earnings multiple of 52 for the current trading year, while Boohoo’s is 53. There’s nothing much between the two valuations to sway me from my choice of Boohoo.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »