Todays announcement by the Chancellor, George Osborne, that there will be a review undertaken into the structure of business rates could have a significant impact on online retailers such as ASOS (LSE: ASC) and BooHoo.Com (LSE: BOO). Thats because, at the present time, online retailers have a considerable advantage over their high street peers, with the amount of business rates they pay being far smaller than if they had physical stores.
For example, business rates are currently calculated using the rental value of commercial premises. While the vast warehouses used by online retailers may be large, they are usually in less favourable positions than the high-footfall shops used by high street retailers, and therefore command less rental value. As a result, the business rates paid by high street companies are typically much higher than those of their online peers, simply due to the way their businesses are structured.
While the review into business rates is not set to complete until early 2016, it could lead to weaker investor sentiment in companies such as ASOS and BooHoo.Com in the meantime. Furthermore, with their high street peers also having the potential to gain from a cash injection of 1 billion for small businesses, the price differential between online and high street stores could be eroded somewhat over the medium to long term. This could make online shopping relatively less appealing, thereby hurting the bottom lines of companies such as ASOS and BooHoo.Com.
While the business rates review could downgrade the longer term forecasts for ASOS and BooHoo.Com, the two companies more immediate futures appear to be very different. For example, ASOS is forecast to post its third straight year of profit declines in the current year, with its bottom line set to fall by 2%. Meanwhile, BooHoo.Coms profitability is set to rise by an impressive 17% this year, and by a further 39% next year.
In terms of their valuations, the two companies appear to be worlds apart. While ASOS has a price to earnings (P/E) ratio of 53.9, BooHoo.Coms P/E ratio of 37.2 is far more appealing especially since it equates to a price to earnings growth (PEG) ratio of just 0.7. Since ASOS is expected to deliver negative growth in the short to medium term, its PEG ratio is negative and, therefore, unappealing.
So, while the Chancellors decision to launch a review of business rates could harm the longer-term performance of online retailers such as ASOS and BooHoo.Com, there is unlikely to be an immediate impact on either of their bottom lines. That said, the current share price of ASOS appears to be rather generous, especially since the company is forecast to disappoint yet again this year when it comes to profitability. BooHoo.Com, meanwhile, with an attractive PEG ratio, could be worth investing in.
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Peter Stephens 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.