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Shoe Zone PLC Could Be A Better Buy Than ASOS plc Or Boohoo.Com PLC

Cheap and cheerful shoe retailer Shoe Zone (LSE: SHOE) hardly seems like a glamourous investment — but just take a look at how the AIM-listed firm has performed over the last six months, compared to highly rated glamour stocks ASOS (LSE: ASC) and Boohoo.com (LSE: BOO):

Company

6-month share price movt

Boohoo.com

-38%

ASOS

-12%

Shoe Zone

+36%

Shoe Zone has just published its first full-year results since becoming a listed company, and the numbers make impressive reading.

The firm reported a 124% rise in adjusted pre-tax profit, and adjusted earnings per share (eps) rose by 160% to 18.0p, beating analysts’ expectations for earnings of 17.7p.

Shoe Zone’s net cash balance rose by 50%, to £9.1m, and the firm declared a maiden dividend of 3.6p per share, giving a prospective yield of 1.6% — although this modest payout is expected to rise to 12.3p this year, giving a prospective 2015 yield of 5.3%.

Online isn’t more profitable

Only 3.1% Shoe Zone’s sales were made online last year, but online revenues rose by 26%, and the firm is continuing to invest in its internet operations, alongside its 545 stores.

In any case, Shoe Zone’s results make it clear that online sales aren’t necessarily more profitable than high street sales: Shoe Zone’s operating margin of 6.7% is higher than those of ASOS (4.8%) and Boohoo (6.4%).

2015/16 outlook

Historical results are useful, but when considering growth stocks it’s important to look ahead. What is the City expecting from each of these firms over the next eighteen months or so?

Company

2015/16 forecast eps growth

2015/16 forecast P/E

ASOS

1% / 28%

48.9

Boohoo.com

18% / 34%

20.2

Shoe Zone

16.4% / not available

11.3

It’s clear that ASOS has got to deliver a serious amount of growth to justify its sky-high P/E. To be honest, I just don’t think this is realistic: in my view, ASOS remains seriously overvalued.

Boohoo.com appears to have a more realistic valuation after last week’s 35% fall. This firm has solid profit margins and recently reported 25% sales growth for the final four months of 2014. I believe a forecast P/E of around 20 is reasonable, given that Boohoo is still in the fairly early stages of its growth cycle.

Remarkably, Shoe Zone trades on a forecast P/E of just 11.3 — astoundingly cheap if it can deliver on forecasts for the year ahead. Current forecasts suggest earnings growth of more than 15%, and a dividend yield of more than 5%, at today’s share price.

Given its low rating, even modest growth will feed through to Shoe Zone’s share price quite fast — unlike ASOS and Boohoo, where considerable growth is already priced in.

Whatever your view, the violent swings we’ve seen in ASOS and Boohoo shares over the last six months make it clear that growth investing can be a risky — but profitable — business.

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Roland Head 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.