With fashion stocks hitting the headlines for all the wrong reasons recently, one could forgive holders of online-only brand ASOS (LSE: ASC) being a little nervous this morning.
Personally, I would find today’s update reassuring. That said, it’s also understandable that the shares fell in early trading. Let me explain.
ASOS: Profiting from lockdown
Despite much of the world being in lockdown over the period, group sales over the four months to the end of June came in 10% higher (£1.01bn) compared to the same period in 2019.
Interestingly, most of this growth came from outside the UK with International sales jumping 17% to £654.1m, helped by the easing of lockdown measures. Representing two-thirds of total sales, this highlights just how geographically diversified the AIM-listed star’s earnings are these days.
Despite remaining cautious on the outlook for the business given the costs of adapting to the coronavirus, ASOS now expects pre-tax profit for the current financial year will come in “towards the top end of market expectations”.
Considering how difficult 2020 has been so far, all this sounds rather marvellous. So, why did the shares fall?
One likely reason is that a lot of this good news is already priced in. The fact that online-only retailers have flourished in the lockdown is no secret. Indeed, recent numbers from out-of-favour peer Boohoo already pointed to massive hikes in sales of items such as loungewear.
Seen from this perspective (and taking into account recent revelations surrounding the treatment and pay of garment worked in Leicester), it’s possible many investors decided to bank some profit.
And who can really blame them? Had you the courage to invest in ASOS at the height of the market crash, you’d now be looking at a stunning gain of around 220%.
Since the share price looks thoroughly up to date with recent news, I think anyone interested in adding a fashion-focused firm to their portfolio should look for value elsewhere.
One potential option is FTSE 100 luxury stock Burberry (LSE: BRBY). Conveniently, it also reported to the market this morning.
Down…but not out
In sharp contrast to ASOS, Burberry said that comparable sales had tumbled 45% over the 13 weeks to the end of June. That said, this percentage had reduced to roughly 20% in June as governments eased lockdown restrictions and stores reopened. Sales in the Asia Pacific region actually returned to growth.
Nevertheless, the tone of today’s release was still pretty gloomy.
Although no one can predict exactly what will happen next, the FTSE 100 member expects trading will “continue to be materially impacted by the pandemic” over Q2 (ending in September). Comparable sales are expected to fall by between 15% and 20%. Some retail stores will remain closed or open for reduced hours.
Knowing this, it’s perhaps understandable that shares were down almost 7% this morning. Being the Foolish long-term holder that I am, however, I’m not inclined to do anything.
While some businesses won’t survive the pandemic, Burberry’s exclusivity should see it through. Positive responses to new product launches bode well. The additional £55m of cost-cutting measures announced today should boost its financial health.
In ‘normal’ times, Burberry achieves great returns on capital and far higher margins than ASOS. These are the sort of stocks to buy and hold for years.
All bias aside, I continue to rate it as a buy at this level.
