Over the past week, both ASOS (LSE: ASC) and boohoo (LSE: BOO) have suffered share price falls. ASOS fell from a high of 4,738p to 3,744p today. Boohoo fell from 293p to 270p. Both stocks have recovered some ground from their initial falls. So which is the better stock for me to buy?
The companies are each other’s main competitor in the online fast fashion retail space. Both benefitted from people working from home spending money on loungewear, though this trend may stop with the end of lockdown. Moreover, repeated UK lockdowns kept physical stores shut. As the UK reopens, they face similar challenges and opportunities.
Is ASOS better value?
In its latest earnings report, it’s surprising to see revenue of £1.3bn for ASOS this quarter, up 31% compared to the same quarter last year. However, increased global shipping costs have hit profit margins. This led to the collapse of the bull run; after a 450% gain from March 2020 to March 2021, the price fall was almost inevitable.
The company’s acquisitions of Topshop and Miss Selfridge has proven to be a savvy investment. The brands are sold in the US in partnership with luxury store Nordstrom. This deal has helped ASOS gain a foothold in the lucrative US market, though less than one sixth of total revenue last year came from the States.
With reduced margins and freight disruption, there needs to be a rapid expansion into the US to see ASOS shares soar. I believe the pandemic has altered consumer shopping. Many consumers have made a permanent switch to online shopping. This new market share is up for grabs in the US; the question is whether ASOS can capitalise on the opportunity.
Some perspective though; its free float stands at 70% of shares, so there’s high risk of volatility. There are also potential new taxes on online sales in the pipeline. The share price dropped to 1,060p in April last year, and another shock could knock it back to that level.
Or is boohoo a better stock to buy?
In my opinion, boohoo has the advantages and setbacks of ASOS, but magnified. The stock is riskier, but with more reliable room for growth. Like ASOS, it already has a foothold in the US. However, it has also announced a new partnership with the Alshaya Group in the Middle East, which owns franchising rights for the region’s Debenhams brand. This could prove to be an untapped goldmine with little competition for market share.
There’s plenty of risk to consider against the potential reward though. Boohoo is fighting a $100m lawsuit in the US for overpricing goods, then using promotions to make the discounts seem like a better bargain. This isn’t the first time it has been in hot water. In the UK, it was reprimanded for using fake countdown clocks, and is still facing inquiries into the use of sweatshop labour in its suppliers’ Leicester factories. This scandal wiped over £1bn off its value in just two days last year.
I like the stock, but the ongoing issues make it too risky for me. It’ll stay on my watchlist though. If the lawsuit is judged in its favour, and negative UK publicity resolved, then it could be a great stock for me to buy in the near future.
Charles Archer 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.