Top Retail Picks: ASOS plc, Burberry Group plc And Boohoo.Com PLC?

Picking winners in the retail sector hasn’t been easy in recent years. Once-reliable supermarkets Tesco, Sainsbury’s and Morrisons have been struggling to deal with a structural shift in grocery shopping habits, which has seen Aldi and Lidl gaining market share hand-over-fist, and high-end operators, such as Waitrose, also thriving.

Are shoppers also getting disillusioned with the boring middle market in the fashion space? Marks & Spencer‘s clothing and home business has been struggling for some time, and it was no surprise to read of a further decline in sales in its latest quarterly update this morning. Next is currently struggling for the kind of growth seen in the past, with its profit guidance range for the current year being -4.5% to +4.5%.

Are more distinctive fashion retailers going to be the big winners of the future? Should we be putting our money into ASOS (LSE: ASC), Burberry (LSE: BRBY), and Boohoo (LSE: BOO)?

Long growth runway

ASOS describes itself as “a unique online fashion destination” and its hard to disagree. In addition to its own-brand label, the company offers a curated range of more than 800 brands, and through its “Marketplace” channel gives boutiques the chance to sell new and pre-worn fashion. Competitions, games, news and features via the website, mobile apps and social networks “help give our target customers an online experience they won’t find anywhere else on the planet”.

The punters love it. Revenue has more than doubled in five years, breaking through £1bn last year. It hasn’t been all plain sailing, with hiccups including a warehouse fire, and a local operation in China that has proved loss-making, which the company has today announced it’s shutting down. However, while profits have hitherto been depressed by considerable investment in the business (and drags such as the China operating costs), they’re now set to rocket higher.

Analysts have pencilled-in earnings growth of 20% this year, accelerating to 35% next year, putting ASOS on a price-to-earnings growth (PEG) ratio of 1.2 at a current share price of 3,370p, which I think looks a reasonable price to pay for a company with a long growth runway ahead.

Strong tailwind

As a mature business — founded in 1856 — luxury fashion house Burberry isn’t going to post the same stunning sales growth as ASOS. But it’s the long heritage of a distinctly British brand that is Burberry’s strength, giving it an enduring appeal, both at home and abroad.

The luxury market has been tough in some territories of late, and, as a result, Burberry’s shares are currently priced at 1,287p, some 30% below their 52-week high. Trading on 18 times earnings, I see the shares as good value on the grounds that the long-term story of rising wealth in developing economies should provide a great tailwind for the timeless Burberry brand for decades to come.

High growth potential

Own-brand online specialist Boohoo delivers bang-on-trend fashion at a cheap price point, sold through aspirational imagery and the kind of social media engagement that appeals to its 16-24 year old target age group. Rag-trade veterans with a highly efficient product sourcing model are behind the company, and it’s growing fast.

The shares have risen strongly over the last year as the market has come to appreciate the growth potential of a business whose current revenue is only around a tenth that of ASOS. Despite the rise in Boohoo’s shares to 43p, the forward PEG ratio is still only on a par with ASOS’s 1.2, so I believe Boohoo remains reasonably priced.

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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.