Should You Dump ASOS plc Shares After Boohoo.Com plc’s Profit Warning?

The online fashion space that targets twentysomethings is highly competitive, with a number of companies offering good value, stylish clothing with fast, free delivery. Among them are ASOS (LSE: ASC) and Boohoo.Com (LSE: BOO), and their performance until the last few weeks had been markedly different.

While ASOS had struggled to grow its bottom line as a result of logistical challenges faced in its international division, Boohoo.Com has enjoyed a relatively prosperous period and as recently as mid-October had announced that it was on target to meet its full year guidance.

However, a marketing push failed to generate the anticipated level of sales in recent weeks, which led to Boohoo.Com releasing a profit warning this week, with net profit now forecast to be around 25% below previous guidance. As a result, shares in Boohoo.Com plunged by 40% following the update.

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Clearly, a profit warning from a key competitor could indicate that ASOS is about to do the same. In fact, the key reason for Boohoo.Com’s disappointing Christmas sales numbers was a highly competitive marketplace, with a number of retailers heavily discounting their prices after an unseasonably warm autumn period left them needing to shift stock to boost sales.

As such, there is a distinct possibility that the external challenges faced by Boohoo.Com have also affected ASOS, which may cause its Christmas trading period figures (which are due to be released on 13 January) to be less impressive than many investors had hoped for.

Looking Ahead

Also of concern for investors in ASOS is the progress being made outside of the UK, with logistical issues causing its international expansion to take longer and be more costly than had initially been planned. This, combined with the potential for a disappointing performance from its UK division, may mean that the company’s share price continues to come under the kind of pressure in the short run that has seen it fall by 10% in the last week.

Clearly, ASOS’s Christmas figures may turn out to be very strong and the challenges affecting Boohoo.Com may not have impacted upon it at all. However, even if they are, the company’s current valuation still seems to be pricing in a vast level of success that, according to forecasts for 2015 and 2016, is unlikely to materialise.

For example, ASOS trades on a price to earnings (P/E) ratio of 55 and yet is forecast to post a decline of 6% in earnings in the current year, followed by growth of 28% next year. This puts it on a price to earnings growth (PEG) ratio of 1.7 which, given its lack of growth over the last two years, seems to be a rather generous valuation.

So, whether or not ASOS posts impressive sales figures on 13 January, now could be a good time to look elsewhere for stocks that offer better value for money.

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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.