During the past six months, the shares ofonline fashion retailers,Boohoo.Com(LSE: BOO) andASOS(LSE: ASC) have dramatically underperformed the wider market. Indeed, during this period ASOSs shares have slumped 62%, while smaller peer Boohoo has seen its share price fall by 43%.
However, the underlying business performance of the two companies could not be more different. In particular, as ASOS has struggled with a perfect storm of negative factors holding back growth, Boohoo continues to grow rapidly.
Trading update
Today saw Boohoo announce its results for thefirst half ended August 31, 2014. The company reported a 31% rise in revenues, or 36% growth in constant currency. Whats more, growth accelerated during the second quarter, with revenue expanding37%, or 41% at constant currency during the quarter.
On a country-by-country basis, Boohoowitnessed growth across all regions. The UK market grew the fastest with revenue rising 50%, sales across the rest of Europe expanded 61% and sales across the rest of the world grew at 8%.
Theres no doubt that these results are significantly better than ASOSs last trading statement, within which the company warned that profits would fall short of expectations by 20m. This shortfall was blamed on the fact that the company wasbeing forced to launch a series of promotions to boost flagging sales growth. As a result, the companys operating profit margin for the full year is expected to fall to 4.5% from 6.5%. Management is still targeting sales of 1bn for the current financial year.
Unfortunately, this was ASOSs second profit warning within three months. As the saying goes, bad news usually comes in threes. So, additional bad news could be on the horizon.
Stealing market share
After looking at todays results from Boohoo, some analysts within the City are now wondering if the online fashion start-up is stealing market share from its larger rival ASOS. And this thesis does make sense, as Boohoos UK sales are surging, while ASOS is being forced to discount heavily in order to drive additional sales growth.
We wont know the full picture until mid-October, when Boohoo reports its interim results. ASOS has already revealed that its half-year pre-tax profits have contracted 22% to 20.1m.
An expensive bet
Investors who want to profit from Boohoos growth story have to be willing to pay a high price. For example, Boohoo is currently trading at a forward P/E of 33.4, earnings per share growth of 16% is expected this year. Current estimates predict that Boohoos earnings will jump by 38% during 2016.
Still, Boohoo is cheaper than ASOS, which trades at a forward P/E of 61.8, despite two profit warnings this year. Analysts believe that the companys earnings per share will fall 19% this year, before rebounding by 44% during 2015. Nevertheless, a forward P/E of 61.8 seems expensive for ASOSs faltering growth.
Theres no doubt that Boohoo and ASOS trade at lofty valuations, which may put some investors off. The key when searching for potential, undervalued multi-baggers is to look under the radar. You want to get on board while the company is still an unknown quantity, that way you wont need to pay a premium in order to benefit from the companys growth.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
