I’ve always been wary of the Boohoo Group (LSE: BOO) share price, just as I was of ASOS (LSE: ASC) before it.
I think both companies have built up superb businesses in what has become a massive and growing market. But investors have put super-high valuations on the shares, as often happens with a new growth prospect.
Boom and bust
The ASOS price has boomed and bust twice in its recent history. And at today’s 3,280p levels, the shares are still down more than 55% from their March 2018 peak. Do you think that means we’re looking at a bargain price now and want to buy? Beware, ASOS shares are on a big forward P/E multiple of 60 based on current forecasts.
ASOS did report a big EPS drop in 2019, mind. And the two years of returning growth that are forecast would drop the P/E to 38. But I still think the market has built a lot of optimism into that valuation, and very little safety margin.
Boohoo shares haven’t soared and crashed to quite the same extent as ASOS. But after a June 2017 high, we did see a loss of nearly 50% by April the following year. Still, the shares have recovered and today are setting new records — but they didn’t equal that 2017 top until September 2019.
Now that Boohoo shares have finally breached those old levels, are they in a new bull run that will provide riches for those buying today?
Strong Xmas
That view seems to be supported by Boohoo’s latest trading update, which revealed a 44% leap in revenue in the four months to 31 December. The firm gained around the globe, though it does get the bulk of it sales from the UK. But even here, where the shopping population is reining-in their spending, Boohoo still saw a 42% revenue gain in the period.
That contrasts with Ted Baker, which is expected to have endured a dreadful Christmas shopping season. Its last update was in early December and was not good. Boohoo really does seem to have got the formula right, by contrast.
Boohoo is strongly cash generative, and reported net cash of £245m on its books at 31 December. That nicely eliminates one of my biggest warning signs for growth shares — debt. There certainly seems to be no chance of Boohoo going bust any time soon.
Gross margins did drop a little though, by 70 bps to 53.5%. But compared to the squeeze on discretionary spending, I think that’s still impressive.
ASOS next
Will ASOS unveil similarly good festive season trading? ASOS is due to report on the same four months, to 31 December, on 23 January, so there’s not long to wait.
Full-year results to 31 August showed a total revenue rise of 13%, with 15% growth in the UK. While high street fashion chains would presumably be delighted with that, it doesn’t compare well with Boohoo’s figures. Retail gross margins dropped a little too, to 47.4% — still healthy, but again, below Boohoo’s.
I hope to see ASOS on an earnings recovery this year, but the shares are way too expensive for me. I think Boohoo is the better choice, but I still fear we’ll see lower share prices in the future.
