It’s been a disappointing year for investors in Ted Baker (LSE: TED) and ASOS (LSE: ASC), with shares in the two clothing companies falling by 17% and 66% respectively since the turn of the year.
However, as recent results from the two companies have shown, Ted Baker seems to be performing much better as a business than ASOS, with it reporting a rise in profit of 24% in the first six months of the current financial year. This contrasts markedly with ASOS, which released a profit warning just a couple of weeks ago and is experiencing vast challenges…
However, as recent results from the two companies have shown, Ted Baker seems to be performing much better as a business than ASOS, with it reporting a rise in profit of 24% in the first six months of the current financial year. This contrasts markedly with ASOS, which released a profit warning just a couple of weeks ago and is experiencing vast challenges as it expands abroad.
Indeed, Ted Baker’s results show a company that has huge future potential. It is gradually increasing the size of its estate, with new stores planned for Heathrow Airport, Miami and Toronto in the current year to add to the 381 stores currently in operation. In addition, the Ted Baker brand continues to gain momentum and this could mean increased potential for price rises to take advantage of deepening brand loyalty.
This means that, over the next couple of years, Ted Baker is forecast to increase earnings by 17% per annum. This is a very impressive growth rate and is far better than expectations for ASOS, which is due to report a bottom line in the current year that is 19% lower than last year, while flat profit growth is pencilled in for next year.
Despite this higher growth rate, Ted Baker still offers better value for money than ASOS. For example, it trades on a price to earnings (P/E) ratio of 23.4, which is less than half ASOS’s P/E of 50.6. This highlights the severe valuation gap that exists between the two companies, despite their hugely different earnings growth potential. For instance, Ted Baker has a price to earnings growth (PEG) ratio of 1.2, which is relatively attractive, while ASOS’s PEG is 0 – simply because it is forecast to deliver no growth next year.
A Stronger Brand
Although ASOS is a hugely popular website among twentysomethings, it simply does not have the strength of brand as Ted Baker does. This is partly because it sells many brands other than its own, but also because it hasn’t had the time to develop the same level of customer loyalty as has Ted Baker (which has been around since 1987).
Furthermore, due to Ted Baker hitting a higher price point, price becomes less of a factor in shoppers’ purchasing decisions than it does for ASOS. This means that increasing prices becomes a viable option for Ted Baker to stimulate its bottom line; something that is far less possible for price-conscious ASOS.
So, due to a stronger brand, higher growth potential and a more attractive valuation, Ted Baker seems to me to be a better buy than ASOS.
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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.