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N Brown Group plc Is On My Shopping List, But ASOS plc Is NOT!

Today saw two of the UK’s biggest online fashion retailers deliver updates that were not quite what the market was hoping for. As a result, shares in N Brown (LSE: BWNG) and ASOS (LSE: ASC) fell by 4% and 10% respectively (at the time of writing) following the updates.

Indeed, this most recent decline comes during what has been a disappointing year for both companies, with N Brown’s share price falling by 27% since the turn of the year and ASOS’s shares dropping by a whopping 64% year to date. However, it’s the former, and not the latter, that could have the most potential as an investment. Here’s why.

Disappointing Updates

ASOS’s update was essentially a profit warning, with the company warning investors that the year to August 2015 would be unlikely to show any growth in profitability. This is the third downgrade to company guidance in recent months and ASOS has stated that the major reason for it is investment in its international capabilities.

While this is a valid reason and shows that the company could have a strong long-term future abroad, ASOS was expected to bounce back strongly next year from what has been a tough 2014. Indeed, net profit is forecast to have fallen by 20% when the company reports its 2014 results, so no growth next year would amount to a major disappointment – especially since the market was anticipating growth of 44% in the bottom line.

Meanwhile, N Brown’s update was far less dramatic. Although the company’s sales numbers were weak in the first half of the year, it is on target to hit second-half expectations. The current year is seen as a year of transition as it gears up for new store openings (including a flagship store on Oxford Street) and is still expected to grow earnings by 10% next year.

Valuation

So, while ASOS’s update is not a disaster, it calls into question the company’s current valuation. That’s because shares in ASOS currently trade on a price to earnings (P/E) ratio of 54. When the company was expected to grow earnings per share (EPS) by 44% next year, a P/E of 54 could be explained via ASOS having a price to earnings growth (PEG) ratio of 1.2. However, now that there appears to be little scope for growth in the next year, it seems difficult to justify such a high valuation.

On the other hand, N Brown’s current valuation is far easier to justify. That’s because it trades on a P/E ratio of just 13.3 and, when EPS growth of 10% for next year is taken into account, a PEG ratio of 1.3 seems very reasonable.

So, while ASOS may have significant long-term potential via continued strong performance in the UK and increased sales abroad, it seems overpriced even after its share price fall. Meanwhile, N Brown, although in a transitional year, seems to offer growth at a reasonable price and, as such, could be worth buying.

Of course, there may be other sectors that offer more attractive investment opportunities than online fashion retail. So, what are they, and how can you take advantage of them?

A good place to start is our free and without obligation guide called Where We Think The Smart Money Is Headed.

The guide is simple, straightforward and could help you to maximise your portfolio returns. As such, it could make 2014 and beyond an even more prosperous period for your investments.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.