2016 has been a rather disappointing year for online fashion retailer ASOS (LSE: ASC). Its shares have fallen by over 10% and there could be further declines ahead due to its sky-high valuation. For example, ASOS trades on a price-to-earnings (P/E) ratio of 66.9 and while its a very high quality business thathas a winning formula in terms of pricing, customer service and diversity, such a high rating is difficult to justify.
Certainly, ASOS is still very much a growth stock. Its bottom line is forecast to rise by 23% in the current financial year, but this puts it on a price-to-earnings growth (PEG) ratio of 2.9 and this indicates that its shares are relatively overvalued. ASOS hasa refreshed strategy thatseeks to focus on its core markets rather than chasing sales growth in new regions via a hefty investment in pricing. Yet it still lacks the investment appeal of rival consumer stocks such as Unilever (LSE: ULVR) and Burberry (LSE: BRBY).
A major reason for this is the brand loyalty thatthose two companies enjoy. While ASOS has its own line of clothing, a large proportion of the productsit sells are branded goods. Therefore, to a large extent its a reseller of clothing. Even though its customer service is arguably better than manypeers and it has a high degree of customer loyalty, thats not as strong as the emotional attachment consumers have towards Unilevers array of products or Burberrys clothing.
This brand loyalty should allow Unilever and Burberry to deliver more resilient sales growth over the long run and also to expand margins at a faster rate than many of their rivals. Thats because consumers are often more willing to accept price rises for their most trusted and favoured brands.
And while both Unilever and Burberry are overcoming the challenge of reduced GDP growth in China, their exposure to the worlds second largest economy should provide them with impressive long-term growth prospects. Thats because Chinese consumers are forecast to enjoy rapid increases in income and are likely to demand more discretionary and luxury goods.
Furthermore, Unilever and Burberry both offer better value for money than ASOS at the present time. For example, Unilever trades on a P/E ratio of 21.5 and Burberry has a P/E ratio of 19. While neither of these figures is exactly cheap when the FTSE 100 has a P/E ratio of around 13, both companies are on offer at a much lower valuation than ASOS.
While their growth potential in the short run may be in the high single-digits rather than the double-digits for ASOS, their track record of growth, brand loyalty and their long-term outlooks make Unilever and Burberry mypreferred options in the consumer goods space.
Peter Stephens owns shares of Burberry and Unilever. The Motley Fool UK owns shares of and has recommended ASOS and Unilever. The Motley Fool UK has recommended Burberry. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.