After the unbelievable success that ASOS has enjoyed over the last decade, it’s understandable that many investors have jumped onboard Boohoo.Com (LSE: BOO), in the hope of similar stratospheric share price gains.
While Boohoo is no doubt growing at an incredible rate, investor enthusiasm towards the retailer has pushed the stock’s valuation up to an eye-watering P/E ratio of 86.8. That kind of sky-high valuation doesn’t leave a huge margin for error, and can result in investors getting their fingers burnt if the company fails to meet expectations. For example, since Boohoo revealed half-year revenue growth of 106% in late September, the stock has fallen 30%.
With that in mind, today I’m profiling another fast-growing fashion retailer that trades at a more reasonable valuation. Could this stock be a better investment?
Don’t be surprised if you haven’t heard of Quiz (LSE: QUIZ), as the retailer only became AIM-listed in late July. The company priced its IPO at 161p, yet today the shares trade for 190p, a rise of 18%. However, I believe there could be more gains to come.
It is a UK-based global womenswear company, that focuses on providing occasionwear and dressy casualwear to 16-35 year olds. The retailer operates a multi-channel approach, selling its clothes both online, and through a network of international franchise stores, concessions and wholesale partners. The company’s ‘just in time’ model enables it to respond in real time to new trends as they emerge, producing high-quality, fashionable clothing within a matter of weeks.
A trading update today reveals strong momentum at present. For the six months to the end of September, group sales rose 35% to £56.1m, and online revenue increased 204% to £13.8m. Chief Executive Tarak Ramzan commented: “Our customer base is growing strongly and we are confident of delivering further growth.”
Quiz vs Boohoo
So how does it compare to Boohoo? Quiz has generated sales growth of almost 50% over the last two years, and City analysts forecast top line growth of 30% and 29% this year and next. In comparison, Boohoo has grown its sales by 110% over the last two years, and analysts forecast growth of 85% and 39% this year and next. Boohoo is the winner here. Similarly, looking at earnings, Quiz is expected to record a 20% increase in EPS this year, followed by a 23% rise the year after. In comparison, analysts expect a 26% rise in EPS this year for Boohoo, and a 31% rise the year after. Once again, the bigger firm is the winner.
However, analysing the valuation of both companies and more specifically, the P/E-to-growth (PEG) ratio, the numbers tell a different story. Boohoo, with its £2.18bn market capitalisation, currently trades on a P/E ratio of 86.8, falling to 68.6 on this year’s estimated earnings. The stock’s PEG ratio is 3.3. But Quiz, with a market cap of just £232m, currently trades on a P/E of 35.6, falling to 29.7 on this year’s anticipated earnings. The PEG ratio is much lower at 1.8.
This suggests to me, that while it’s clear Boohoo is growing at a faster rate, investors are paying a hefty premium for shares in the larger retailer. For fast growth at a more reasonable valuation, Quiz may be the better stock of the two, in my opinion.
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Edward Sheldon has no position in any stocks mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.