The following two UK shares have scope for growth and would make tempting additions to my portfolio. However, I’ve one worry. Both sell cheap fashion but their share prices are expensive.
The Associated British Foods (LSE: ABF) share price is holding firm today even though the group’s star attraction, budget clothing chain Primark, has just warned of a £1bn drop in revenues. The lockdown is biting, with revenues at the FTSE 100 group down 13% over the 16 weeks to 2 January, a loss of £540m. Primark’s revenues fell a thumping 40%, although trading was strong when stores were open.
If stores remain shuttered until 27 February, management says the loss of sales will total £1.05bn, up from the £650m predicted on 31 December. All they can do hope the vaccines work. That’s the story with so many UK shares right now. Either way, around £200m of unsold autumn/winter stock is piling up in warehouses.
Foods for thought
Primark doesn’t run an e-commerce operation alongside its high street stores, which wasn’t a problem until the pandemic. Investors expected bad news and have taken it on the chin, with the share price down only slightly. At least store closures cut operating costs by 25%.
Shoppers will fly back when stores do open, and the group is expanding across Europe and the US. However, future growth is priced in with the stock trading at 27 times earnings, at a time when many top UK shares are trading at bargain prices. There’s no dividend either for now.
Shares in online fashion rival Boohoo Group (LSE: BOO) are down around 4%, even though today’s trading update reported 40% sales growth in the final four months of the year, to £660.8m. Management even upgraded full-year sales growth guidance. The UK and US, which make up around 80% of revenue, were best performers.
I’m looking for cheaper UK shares
Boohoo is fighting back against a supply chain and working conditions scandal. It appointed High Court judge Sir Brian Leveson to provide independent oversight and, today, reported “significant progress” on its Agenda for Change programme. We hear a lot about how ethically-minded young people are these days but this hasn’t stopped them from splurging at Boohoo. At least management has reacted swiftly, even if it didn’t have much choice in the matter.
The group has relaunched the Oasis and Warehouse fashion brands on its multi-brand platform, alongside Nasty Gal, Karen Millen and Coast. Investors are concerned about shrinking margins, which slipped 50 basis points over the year to 53%. That may explain today’s share price dip.
The big worry is its valuation, as the Boohoo share price now trades at more than 60 times earnings. That gives little scope for underachievement. With net cash of £386.9m (up from £344.9m at the end of August), it has the funds to fuel further growth though, and may still outpace many UK shares in the longer run.
Boohoo may soon face the opposite problem to Primark. The end of the lockdown could hit its sales, as stir crazy shoppers flee back to the high street.
I reckon both will do well in the longer run. But their valuations make me feel other UK shares offer better opportunities right now.
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods and 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.