Last week, ASOS released interim results, which were great overall. While I think this announcement is positive for the online retail sector, I’m bearish on boohoo shares. For now, I won’t be be buying the stock in my portfolio and I’ll explain why.
I think ASOS’s interim results were exceptional. In the six-month period, total sales and profit before tax increased strongly. But ASOS’s stock price fell on the back of this. I think there were a few reasons for this and I reckon it could hinder boohoo shares too.
I think the fact that both online retailers have been winners in the pandemic is already factored into the stock prices. This is reflected in the high price-to-earning (P/E) ratios for each of the companies.
But I also think why ASOS shares fell on its results is because there are concerns about whether the online retailer will continue to grow at the same rate now that the high street shops have opened in the UK. This is likely to impact boohoo as well.
ASOS also announced that it’s investing more in marketing. This means that if the cost of promotional activity is increasing for ASOS, then it’s likely boohoo may have to do the same to compete. This increase may place pressure on profitability for both online retailers. Hence I don’t think boohoo shares will rise after ASOS’s results.
Boohoo’s own problems
While ASOS may be its competitor, boohoo has enough of its own problems to contend with. Hence I will not be buying the stock on such a high valuation.
I’ve previously commented on the allegations of slave labour that mean boohoo could face a potential US import ban. I found this alarming and yet the corporate governance issues will not go away.
Boohoo is showing investors that it’s doing everything in its power to address these concerns ever since the scandal of exploitation of workers at its Leicester supplier factories. At the end of last month, the online retailer published a list of its UK suppliers six months after an independent review by Alison Levitt, QC. Boohoo also announced that it’s focusing on sustainability. For me, this is just the start of the company trying to redeem itself from its previous corporate governance issues. I’d like to see further evidence that it’s consistently improving its legacy problems.
While boohoo may have figured out the fast fashion market, I’ve recently become concerned about the pricing of its items. The same items of clothing are being sold at different prices across boohoo’s brands. I reckon this is a problem of growing too quickly.
In my opinion, customers pick up on these issues straight away and may lose trust with the brand. This could have an impact on boohoo shares.
I can’t dismiss the phenomenal growth boohoo has achieved. But I think the corporate governance concerns could impact the share price. Especially when the stock is trading at a high P/E ratio of 57 times, it’s likely to be sensitive to any negative news. For now, I’ll only be monitoring boohoo shares.
Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS 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.