Apple is not the only big stock to be shocking markets with profit warnings recently. On this side of the Atlantic, online fashion favourite ASOS (LSE: ASC) was also spooking investors in the run-up to Christmas by downgrading earnings expectations of its own. The investor exodus that followed led the company to close at its cheapest for four years in the following sessions as the firm advised of a “significant deterioration in the important trading month of November,” and that “conditions remain challenging.”
Clearly, there could be more trouble around the corner as a toughening economic landscape in the UK dents shopper buying power and consumer confidence, a stage that could worsen still further should a disorderly Brexit materialise in the months ahead.
The outlook for its home territory is not the only cause for concern, however, as decelerating economic activity on the continent is also smacking ASOS’s bottom line. In the continental engine rooms of Germany and France — territories which account for three-fifths of total EU sales — trading has become “significantly more challenging” of late, ASOS also advised.
City brokers have been furiously slashing their earnings forecasts in the wake of these scary numbers and a 28% drop is now predicted for the fiscal year ending September 2019. Given the worsening momentum in the online fashion giant’s core territories, allied with its elevated valuation, a forward P/E ratio of 34.6 times, the retailer is in clear danger of more share price pain in the months ahead.
Under more pressure?
That said, I’d much rather buy this business today than FTSE 100 clothing and food seller Marks and Spencer Group (LSE: MKS), even though the latter carries a bargain-basement prospective P/E multiple of 10.4 times and comes packed with an inflation-smashing 7.5% dividend yield.
The number crunchers are presently expecting a 13% earnings fall in the 12 months to March 2019, a forecast which, like that of ASOS, has also been downwardly revised in recent weeks. And as I’m expecting another disappointing trading release when it updates the market on Christmas trading on Thursday, January 10, I’m expecting further markdowns in the near future and, with it, a fresh downleg in the share price. A raft of successive, disappointing market updates caused M&S’s market value to plunge almost a third in 2018.
I’ve moaned time and again about how Marks & Spencer’s management teams have failed to effectively read the pulse of British fashion, leaving rails and rails of clothing unsold in its stores. With competition increasing for its general merchandise and food divisions, and the economic landscape becoming more and more difficult, I’m not expecting the Footsie firm to break out of its tailspin, at least not any time soon.
Conversely however, I’m tipping ASOS to ride through any current hiccups and post decent profits growth over the long term because of its robust position in the online clothing segment. For this reason it’s a much better buy than M&S, certainly in my opinion.
As Next’s update this week showed, internet-focused retailers remain well placed to exploit the changing shopping habits of we consumers, this Footsie firm advising of a 15.2% explosion in online revenues in the two-or-so months to December 29. And thanks to the popularity of its fashions and its broad geographic footprint, I’m confident it should still produce scintillating profits growth in the years ahead.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple and ASOS. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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.