Todaysaw two of the UKs biggest online fashion retailers deliver updates that were not quite what the market was hoping for. As a result, shares in N Brown (LSE: BWNG) and ASOS (LSE: ASC) fell by 4% and 10% respectively (at the time of writing) following the updates.
Indeed, this most recent decline comes during what has been a disappointing year for both companies, with N Browns share price falling by 27% since the turn of the year and ASOSs shares dropping by a whopping 64% year to date. However, its the former, and not the latter, that could have the most potential as an investment. Heres why.
ASOSs update was essentially a profit warning, with the company warning investors that the year to August 2015 would be unlikely to show any growth in profitability. This is the third downgrade to company guidance in recent months and ASOS has stated that the major reason for it is investment in its international capabilities.
While this is a valid reason and shows that the company could have a strong long-term future abroad, ASOS was expected to bounce back strongly next year from what has been a tough 2014. Indeed, net profit is forecast to have fallen by 20% when the company reports its 2014 results, so no growth next year would amount to a major disappointment especially since the market was anticipating growth of 44% in the bottom line.
Meanwhile, N Browns update was far less dramatic. Although the companys sales numbers were weak in the first half of the year, it is on target to hit second-half expectations. The current year is seen as a year of transition as it gears up for new store openings (including a flagship store on Oxford Street) and is still expected to grow earnings by 10% next year.
So, while ASOSs update is not a disaster, it calls into question the companys current valuation. Thats because shares in ASOS currently trade on a price to earnings (P/E) ratio of 54. When the company was expected to grow earnings per share (EPS) by 44% next year, a P/E of 54 could be explained via ASOS having a price to earnings growth (PEG) ratio of 1.2. However, now that there appears to be little scope for growth in the next year, it seems difficult to justify such a high valuation.
On the other hand, N Browns current valuation is far easier to justify. Thats because it trades on a P/E ratio of just 13.3 and, when EPS growth of 10% for next year is taken into account, a PEG ratio of 1.3 seems very reasonable.
So, while ASOS may have significant long-term potential via continued strong performance in the UK and increased sales abroad, it seems overpriced even after its share price fall. Meanwhile, N Brown, although in a transitional year, seems to offer growth at a reasonable price and, as such, could be worth buying.
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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.