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Why I’d buy Boohoo and shun ASOS

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Comparing the share price charts for online clothing fashion retailers ASOS (LSE: ASC) and Boohoo (LSE: BOO) could lead you to pick ASOS as a potential investment because the shares have fallen back from earlier highs. But I wouldn’t. I’d go for Boohoo because I think it runs a better business.

Operational slip-ups

Last week’s full-year results report from ASOS revealed to us that revenue continued to grow during the year but earnings collapsed. The company explained in the report that the “huge” investment it made in an effort to prepare the business for scaling up operations in the EU and the US “has been more challenging than we foresaw.”

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The firm owns up to having “underestimated” the effects of large-scale operational change being executed on two continents at the same time. The company was not prepared, it said, “for the additional complexities of planning and trading across our expanded warehouse footprint.”

It seems the company dropped the ball regarding “product, presentation, and customer engagement.” In other words, it stopped getting the basics right, which caused profits to vanish.

Looking ahead, ASOS is confident it has identified its problems and can sort them out going forward. Great! Perhaps this is a case of short-term problems knocking a share price back and opening up a buying opportunity for investors. Maybe. But I’m not keen on the firm in the first place.

A clear winner on profitability

Even looking back to before the recent operating problems, ASOS only achieved an operating margin of around 4.2% in the trading year to August 2018. That compares to Boohoo’s operating margin, which is running close to 7%. It’s clear that Boohoo is able to squeeze more profits from turnover than ASOS can.

Meanwhile, City analysts following both firms expect earnings to start to recover for ASOS, but in the current trading year, they expect a shortfall compared to the year to August 2018. But with Boohoo, they are predicting robust double-digit percentage advances in earnings this year and next year with profits breaking into higher ground year on year.

In September’s interim results report, Boohoo’s chief executive John Lyttle said the firm is well-placed and confident” that its platform will deliver further market share gains because it combines “the latest fashion, great prices, and excellent customer service” with a well-invested infrastructure.

That strikes me as being almost exactly the same basics of the business that ASOS has been messing up recently.

Vibrant Boohoo

Boohoo is powering ahead, winning market share and executing well along the way. There’s no sign of the kind of growing pains that ASOS has been experiencing and it seems to me that Boohoo is generally the most vibrant business of the two.

Meanwhile, with the share price near 3,081p, you can pick up some ASOS shares on a forward-looking earnings multiple of 52 for the current trading year, while Boohoo’s is 53. There’s nothing much between the two valuations to sway me from my choice of Boohoo.

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Kevin Godbold has no position in any share 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.

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