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Which Online Retailer Deserves Your Cash: ASOS plc Or boohoo.com plc?

ASOS (LSE: ASC) issued an upbeat summer trading statement today, although the company’s shares have hardly reacted to the good news. 

Group revenue expanded 21% year-on-year during the four months to June 30. UK sales expanded by 27% while ASOS’s international sales, which account for 59% of total group business, grew 16%. 

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For the first ten months of ASOS’s financial year, revenue increased by 17% compared to the prior year. What’s more, the group’s retail gross margin has widened by 2.80% year-on-year, as tighter inventory control and strong full price sales have helped offset promotional activity.

A great relief

For ASOS’s shareholders, today’s update is a great relief. It marks an end to a string of profit warnings and a costly warehouse fire, all of which have taken place over the past 12 months.

And based on today’s figures, ASOS’s management believe that the majority of the company’s troubles are now behind it. Management expects the group to report full-year sales growth at the higher end of its guided 15-20% growth range. 

Not good enough 

Still, while today’s upbeat trading statement is a welcome relief for ASOS’s investors, the group isn’t out of the woods just yet.

ASOS’s growth continues to contract, and for a company that’s trading at a forward P/E of 91, I’d argue ASOS’s sales growth is disappointing. 

Indeed, group earnings per share are set to fall by 4% this year, before rebounding by 26% during 2016. Based on these numbers, ASOS is trading at a 2016 P/E of 71. 

In comparison, boohoo.com (LSE: BOO), ASOS’s closest listed comparable peer, is currently trading at a forward P/E of 25.5. Further, Boohoo’s earnings per share are on track to expand by 43% this year, and City analysts believe group sales are predicted to grow by around 26%. 

That said, according to boohoo’s own trading update for the three months ended May 31, during the first quarter of year group sales had expanded by 37% at constant exchange rates. The number of active customers shopping with the group increased by 32% during the period to 3.3m.

The number of active shoppers using ASOS’s services only grew by 11% year-on-year during the first ten months of the company’s financial year, although this was from a much larger base of 9.8m customers. 

The better investment

It’s clear to me that on several metrics, boohoo is the better investment. Also, the company looks cheap compared to the growth that it is expected to generate. 

boohoo is currently trading at a PEG ratio of 0.6 based on current growth forecasts. A PEG ratio of less than one indicates growth at a reasonable price. As ASOS’s earnings are expected to fall this year, it’s not possible to calculate the group’s forward PEG ratio. However, based on ASOS’s projected growth for 2016, the company is trading at 2016 PEG of 2016. 

And, as a bonus, boohoo has cash and equivalents worth around 5p per share or around 19% of its current share price. ASOS has a cash-rich balance sheet, but cash only amounts to approximately 80p per share. 

So overall, boohoo looks to me to be the better investment based on the company’s sales growth and attractive valuation. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares of boohoo.com. 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.

 

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