Further, both boohoo and ASOS have used the pandemic to expand by buying up struggling or bankrupt brick-and-mortar retailers.
These acquisitions have helped these companies cement their positions in the market and improve brand awareness with consumers.
The better operator
Of the two, I think boohoo has been the better operator.
The company has chased market share aggressively over the past few years. It has relied heavily on marketing and collaboration strategies and keeping costs as low as possible. Net profit has grown at a compound annual rate of 49% since 2016, rising from £12m to £91m during this period.
In comparison, the ASOS share price has lagged that of boohoo as its earnings have grown at less than half the rate of its peer. Over the past six years, the company’s earnings per share have increased at a compound annual rate of 23%.
City analysts do not expect this trend to come to an end any time soon. They have pencilled in earnings growth for ASOS of 18% in 2021 and just 5% in 2022. Meanwhile, boohoo’s earnings growth is predicted to come in at 43% for 2022 and 25% for 2023.
In addition, boohoo’s cash balance is around £258m compared to a net debt position of £238m for ASOS. Therefore, it looks as if ASOS has more financial firepower available for completing deals and marketing.
All of these numbers suggest to me that boohoo is the better buy. The ASOS share price also looks expensive compared to the company’s projected growth.
The stock is trading at a price-to-earnings growth ratio of 5, which is compared to 1 for boohoo. A ratio of less than one may indicate that a stock offers growth at a reasonable price.
ASOS share price risks
However, despite the company’s attractive qualities, when I look at boohoo, I see a business drowning in reputational issues and legal threats. It is currently fighting a $100m consumer rights lawsuit in the U.S. over allegations of false pricing.
The company has also faced criticism for its working practices, which might put some investors off investing.
On the other hand, ASOS has fewer reputational issues, and even though the company’s growth is set to lag that of its peer, this is enough to sway my opinion of the enterprise.
Still, even ASOS is not a risk-free investment. Fashion is an incredibly competitive industry. Top Shop’s former owner Arcadia used to be one of Europe’s top retail businesses. It collapsed last year, and ASOS bought its leading brands for £265m, a fraction of their former worth. This shows that even the best retailers are not immune to change.
Even after taking this risk into account, if I had to choose between boohoo and the ASOS share price, I would buy shares in the latter, considering its growth potential and better reputation.
Rupert Hargreaves 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.