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Should I snap up the soaring Boohoo share price after cracking results?

If you take a look at the Boohoo Group (LSE: BOO) right now you could guess something good has just happened. It’s a top set of full-year results, and though the share price has yet to regain its previous highs of 2017, a 48% climb since the start of 2019 is certainly sending it in the right direction.

A 48% leap in revenue leading to a 49% jump in adjusted pre-tax profit is certainly impressive. Adjusted diluted EPS only rose 29%, mind, but that’s still an impressive performance. And the company ended the year with £190.7m in net cash on its books.

Big valuation

But then I turn to the stock’s fundamental valuations and I’m taken aback just a little — the shares are valued at a P/E of 58, based on that adjusted diluted EPS figure. And considering forecasts of around 5p in EPS for the coming year, we’re still looking at a multiple of 48 — and 40 the year after.

This all reminds me of the fashion pioneer that blazed the trail that Boohoo now travels, ASOS (LSE: ASC), whose shares are also on sky-high valuations. ASOS shares are on an even loftier P/E of 75, based on full-year forecasts, and that’s even after the price has crashed since early 2018.

The ASOS price did pick up in early April after the company reported an 87% fall in first-half profits. If you think that sounds bizarre, I’ll hand you over to my colleague Harvey Jones to explain what happened.

Business model

I confess I didn’t grasp the ASOS business model when I first heard about it, unable to understand why people would want to buy clothing without seeing it first and trying it on. But it seems that’s not a problem — customers just order lots of stuff and send back what they don’t like and what doesn’t fit. And I can see the attraction in that.

But that approach has been turning around and biting ASOS, after the firm changed its rules to try to deal with the avalanche of returns it’s been getting. Customers returning “way more” than expected, together with those suspected of wearing items and then sending them back, could have their accounts suspended.

Though ASOS says the new rules shouldn’t affect the majority of its customers, with no explanation of how it’s deciding who to cut off, many are feeling puzzled and let down by the retailer. Some have reported being excluded without a clear explanation why.

A necessary step to reduce abuse of clothing returns? Maybe. A bad bit of customer PR? Definitely.

Pioneering problems

Will similar issues affect Boohoo? I don’t see how they can’t pose threats. Boohoo similarly needs to balance a friendly returns policy aimed at securing the loyalty of long-term customers against becoming a major force in keeping the Royal Mail in business. But if such problems do arise, Boohoo could perhaps handle them better.

These two are pioneering the online-only fashion business but, as Warren Buffett has pointed out, it’s rarely the pioneers who eventually clean up. On that thought, and considering these sky-high share price valuations, I’m not touching either.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. 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.