ASOS (LSE:ASC) and Boohoo (LSE:BOO) are considered pioneers in online fast fashion. Both the ASOS share price and the Boohoo share price have crashed for different reasons recently. If I were to pick one for my portfolio, which stock should I choose?
Online fast fashion boom
Online shopping can be defined as clicking a few buttons on your device of choice and purchasing your favourite goods rather than physically visiting a shop. Fast fashion is a term used to describe a highly profitable business model. It’s based on replicating high end fashion trends by mass producing them at low cost and selling them at a low price point.
ASOS and Boohoo have played a major part in amalgamating these two things to create successful multi-billion pound companies. The ASOS share price and Boohoo share price performance is a sign of their growth. Online sales for the 20 biggest online retailers, including Boohoo, hit a record £16bn in the last year.
Bricks-and-mortar retailers have been suffering from the rise in technology and convenience on offer to consumers. The Covid-19 pandemic exacerbated this. Projections from the Office of National Statistics, created pre-pandemic, predicted that online sales would reach close to 30% of total retail sales in 2025. In fact, this figure was achieved in 2020. Five years worth of progress achieved in one year is quite remarkable.
A recent survey showed that only one in three fashion shoppers said they hoped to return to their pre-pandemic shopping behaviours. 12% of those buying clothes during the pandemic did so online for the first time. 71% of UK online shoppers who shopped online for the first time during the pandemic will continue to shop online post-pandemic.
Boohoo share price woes
As I write, shares in Boohoo are trading for 187p per share. At this time last year, Boohoo shares were trading for 313p per share, a 40% drop. The shares in the past month have fallen over 25%. At this time last month, shares were trading for 259p.
The Boohoo share price graph is reminiscent of a very exciting roller coaster, with many ups and downs since the pandemic started. Up until February 2020, the ascent was exciting to watch as sales and reputation grew hand in hand.
When the market crashed, shares across worldwide markets plummeted. Boohoo capitalised on online shoppers under restrictions and saw trading increase. Its share price rose to highs above 410p. Since that point in June 2020, there have been supplier issues, a lawsuit, and less than stellar results. At current levels, Boohoo shares look beleaguered to me.
The most recent dip in the Boohoo share price has been down to the interim results announced on 30 September. These results covered the six months to 31 August. There were some positives to note from the results in my opinion. For example, sales figures were impressive at £976m and better than the same period for H1 2021 and 2020. Current sales figures were up compared to pre-pandemic FY 2020 levels.
The trading update by Boohoo also laid bare some major issues for me. Earnings before interest and taxes (EBIT) dropped by 19%. This led to a 20% drop in pre-tax profits and 15% drop in diluted earnings per share. Cash reserves also took a major hit of £246.5m after acquisitions. Whenever I see a business experience a rise in revenue but drop in EBIT and profit, I immediately think margins are an issue.
Other issues affecting the Boohoo share price include dampened investor sentiment from ongoing supply chain issues and a lawsuit in the US. Lowering the profit target for FY 2022 compounded things further in my opinion.
The ASOS share price woes
As I write, ASOS shares are trading for 2,367p. A year ago, the shares were trading for 4,644p, which is an 96% drop. ASOS shares have traded as high as 7,600p back in 2018 when the firm was enjoying its best period on the FTSE.
To provide a snapshot of its recent woes, ASOS shares are down 12% this week, from 2,819p to current levels. In the past month, shares have dipped 20%, from 3,099p to current levels.
Similar to the Boohoo share price, it has been tough going for the ASOS share price. The ASOS shares also look beleaguered but for different reasons. A change in leadership, profit warnings, and supply chain issues are affecting it but unfortunately all at the same time!
Issues for ASOS
Two announcements on Monday morning further affected the ASOS share price. Firstly, there was the announcement that long-serving chief executive Nick Beighton will leave the company. Beighton is considered instrumental in ASOS’ rise in recent times. No reason for his departure was given.
Secondly, ASOS published final results for the year ending 31 August 2021. The financials did not change much from the interim announcement. My eyes were drawn to the profit warning and weaker sales growth expected this year. It predicted approximately half as good revenue compared to 2021’s rise of 20% in revenue. In addition, margins slipped too. Predicted profits for the current year are between £110m and £140m. FY 2020 saw a profit of £196m. Investor confidence will have taken a knock from these forecasts.
The ASOS share price was already falling due to its own supply chain issues as well as higher labour costs and Brexit pressures. The Boohoo share price has been affected by these too. Announcing lowered expectations and a board change at the same time was a double blow for ASOS.
There has been a lot of negativity circulating around both ASOS and Boohoo recently. They both still have positives too in my opinion. Both have grown exponentially in recent years so growing pains could be expected and account for the recent dips. Both continue to record positive sales figures and a profit as well, although perhaps not as much as expected or promised. Finally both firms are happy to complete acquisitions to beat off competition and enhance their offerings and profiles.
Reviewing the ASOS share price versus the Boohoo share price, and considering their past track records and recent woes, I would choose shares in ASOS for my portfolio. I believe it will return to growth and recover over time. As a savvy investor, I invest for the long term so I can accept some short to medium-term pain.
The Boohoo share price has been hampered by external issues as well as market conditions. The ASOS share price decline could be down its own making with the profit warning and change in leadership. Market conditions have also played a part. Overall, I feel ASOS is better equipped to bounce back which is why I would pick it over Boohoo.
Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended ASOS and 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.