Are Online-Only AIM Superstars ASOS Plc & Plc The Future Of Retail?

Having their fingers on the pulse of what consumers across the globe want to wear has allowed online-only fast fashion retailers ASOS (LSE: ASC) and (LSE: BOO) to steal major market share from high street retailers who traditionally owned the market. However, as those retailers fight back, it remains an open question whether these fast fashion leaders can keep this growth going for years, much less decades, to come.

A relative newcomer to the field, has quickly expanded from selling £24.5m of low-cost clothing in 2011 to £139.9m in the past fiscal year. This growth hasn’t come without growing pains though, and the shares, despite a year-to-date rally, are still down 40% from their 2014 IPO price.

The main reason for this has been a dip in top-line growth as international expansion became too scattershot amidst moves into developing countries. Management appears to have heeded these lessons and has redeployed marketing spend to higher-spending countries such as the USA and Australia. And with only £24m of sales outside the UK in the past quarter, the company has considerable room to grow if it can replicate its domestic formula for success.

Despite this top-line growth, Boohoo still scares me. The company’s target demographic is 16-24 year olds, a notoriously fickle age cohort whose taste in clothes changes rapidly. While Boohoo can get a blouse or £12 pair of shoes from the design studio to customers’ hands in mere weeks, I remain unconvinced it can continue this trend for years. Stock markets across the globe are littered with the corpses of once-high-flying youth retailers who have failed to keep up with the times. While Boohoo may defy gravity for several quarters or even years, I think it may find it hard to grow into a pricey valuation of a full 41 times forward earnings.

Transitional period

Asos, the domestic leader in online-only fast fashion, appears to have taken a similar message to heart and is in the middle of an important transition in its business model. The company, while still selling own-brand clothing, is seeking to leverage its category-leading social media and web presence to become a platform for more established brands to sell their goods on.

This is a wise plan as the traditional high street retailers roll out new online offerings to tempt customers back. And some of these large retailers have much more pricing power than Asos, which has already been devastating for margins. Pre-tax margins fell from 7.1% in 2013 to 4.1% in the past year as Asos was forced into a price war and major infrastructure logistics upgrades to better compete. And, while selling other brands on the Asos website is a wise move, there’s nothing to stop any popular brand from cutting out the middle man in the future if a strategy change means they want to focus on their own sites.

Although share prices are down more than 50% from their 2014 peak, they still trade at an astounding 61 times forecast 2016 earnings. This combination of sky-high valuation and falling margins doesn’t give me much confidence that Asos will be rewarding shareholders over the coming years.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended 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.