In a sign of the times. FTSE AIM 100 online fashion retailer Boohoo (LSE: BOO), which owns a number of popular brands including Boohoo, Pretty Little Thing, and Nasty Gal, now has roughly the same market capitalisation as high street stalwart Marks & Spencer Group (LSE: MKS). As I write, Boohoo has a market-cap of £3.55bn, whereas Marks & Spencer has a market value of £3.59bn.
From an investment point of view, the two retail stocks are very different in nature. Boohoo is a growth stock that trades at a very high valuation (forward-looking P/E ratio 55) and pays no dividend. It’s done really well over the last year, rising around 60%.
By contrast, Marks & Spencer is more of a value/contrarian stock. It trades at a low valuation (forward P/E ratio of 10) and sports a big dividend yield (nearly 6%). Over the last year, MKS shares have underperformed, falling about 35%.
Interested to know which stock I’d go for out of the two right now? Read on…
From a growth investing perspective, I see a lot of appeal in Boohoo, despite its high valuation. The reason I say this is that the company has a lot of momentum right now.
Over the last three years, revenue has soared from £195m to £857m, which represents a compound annual growth rate (CAGR) of an incredible 64%. And a trading update issued on 14 January showed further progress, with sales for the four months to 31 December 2019 rising 44%.
Looking ahead, I think there could be plenty more growth to come from Boohoo. Its brands remain extremely popular with Millennials (Pretty Little Thing now has 12.2m Instagram followers, up from 11.4m in October) and international markets present a huge opportunity for the group. The company’s data also provides a competitive advantage. If growth remains strong, I expect the share price to keep rising.
From a value investing perspective, I don’t see the same kind of appeal in Marks & Spencer shares. Sure, the stock’s valuation is cheap. But so it should be.
Over the last three years, revenue has actually declined. And for the 13 weeks to 28 December, the group reported total revenue declined 0.7%, with clothing and home sales falling 3.7%. In addition, the company has a very low return on equity (3-year average ROE of 1.8% versus 22.2% for Boohoo), a large chunk of debt on its balance sheet, and it cut its dividend by 40% early last year. Overall, I see M&S as a low-quality stock.
I’ll point out that I do think its food division has potential. Some of the new M&S Food Halls are brilliant. However, the clothing division just continues to cause problems for the group. Until it sorts out this side of the business, I don’t see the firm as a good investment.
So, all things considered, Boohoo is my pick of the two. The FTSE AIM 100 stock is expensive, but I think the future looks exciting.
Edward Sheldon owns shares in Boohoo. 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.