High-flying online fashion retail firm Boohoo Group (LSE: BOO) trades on a mighty historic price-to-earnings (P/E) ratio close to 90. However, City analysts’ forecasts of double-digit increases in earnings over the next couple of years bring the forward P/E rating down to a ‘mere’ 49 or so for the trading period to February 2020.
At a valuation like that, the stakes are high, and any slip in earnings will bring a sharp share-price reversal. We’ve seen it many times. Expectations are everything with fast-growing firms. Miss the earnings projection and it’s ‘look out below!’ Yet Boohoo is growing like mad and there’s no sign of any weakness whatsoever in the firm’s financial performance. Maybe it’s worth its high valuation and will go on to reward its investors handsomely in the years to come.
I think there probably is a fair bit of upside left for investors in Boohoo, but you’ll need a strong constitution to ‘hold’. However, if the valuation puts you off you may wish to consider Ted Baker (LSE: TED) instead, which owns and operates what it describes as a “global lifestyle brand.”
The firm has grown from a single shirt specialist store in Glasgow and now sells clothes for men, women and children along with fragrance and accessories. Today, there are around 201 stores or concessions or outlets in Britain, 116 in Europe, 129 in North America, 89 in the Middle East, Asia and Africa regions, and nine in Australasia. There’s no sign that the expansion programme is running out of steam either. In fact, the opposite is true.
Expansion on track
Today’s interim results revealed that in the first half of the trading year the firm opened two new stores in the UK, three in the US, two in Germany and one in France, as well as gaining concessions with “leading department stores” in the UK, Europe and North America and establishing licensees in India, Kazakhstan, Malaysia, Mexico, Singapore, Taiwan and Ukraine. Despite such progress, the shares have plunged around 10% today as I write, so why is that?
The figures are quite good. Revenue rose 3.5% compared to the equivalent period last year and adjusted earnings per share moved 5% higher. The directors even expressed their vote of confidence in the outlook by pushing up the interim dividend by 7.8%. The ‘problem’ as I see it is in the outlook statement. Chief executive Ray Kelvin CBE said in the report that he expects the second half of the year to “remain challenging” because of “external factors.”
However, conditions have been challenging in the retail sector for some time, but Ted Baker posted a 1.8% fall in unadjusted earnings per share today, and I reckon the stock market is in an unforgiving mood right now. Nevertheless, the growth story remains on course, and I see share price weakness now as an opportunity to grab a piece of the long-term potential on better terms. With the share price close to 2,076p, the forward P/E for the trading year to January 2020 sits just under 13 and the forward dividend yield is a little below 3.7%. Meanwhile, City analysts expect earnings to grow at around 10% a year. I think the stock is attractive.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group and Ted Baker. 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.