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Boohoo [BOO] share price boosted by extraordinary financials, but is Asos a better buy?

Is now an opportunity to buy into Asos and Boohoo, two British online retail behemoths with global reach?

Investors put off by the struggles of high-street retailers would do well to look online. With consumers now buying more over the internet than ever before, digitally native retail firms are well placed to grow their slices of the market.

 

Asos

Asos [ASC] might be undervalued following a big sell-off in December, according to Proactive Investors, which suggests now is the time to be looking closely at its shares.

A decrease in consumer spending confidence, high levels of discounting and unseasonably warm weather made for a challenging spell for retailers generally, and Asos had a difficult winter. It was forced to issue a profit warning and slash its full-year sales growth forecasts from 20-25% to 15%.

But the London-based online retailer has made a massive rebound since its December slump, gaining nearly 35% in the first month of 2019. It made a pre-tax profit of £102m for the year ending 31 August, up 28% year-on-year. Revenue grew 26% to £2.42bn.

With the release of its full-year report for 2018, CEO Nick Beighton said: “Our reported profit increase was achieved despite bearing material transition costs due to our investment programme.”

As of late 2018, Asos’ operating cash flow is £101m, its net investing cash flow is £213m and its free cash flow is £42.7m, a significant drop-off on previous years, though these numbers account for a dramatic increase in investment, which rose by more than 40% year-on-year.

 

Boohoo

Boohoo Group [BOO] delivered impressive numbers for the last four months of 2018 – revenues rose 44% to £328.2m, with £180m from the UK alone.

Founded in 2006, the ecommerce company sells women’s fashion via Boohoo, PrettyLittleThing and Nasty Gal. All three brands reported revenue up from the previous quarter in its recent earnings report. PrettyLittleThing’s revenue nearly doubled, rising by 95% to £144.2m, while NastyGal’s grew 74% to £20.6m. Revenue for the flagship brand grew 15% to £163.5m.

95%

Increase in PrettyLittleThing's revenue Q3-Q4 2018

Emily Salter, a retail analyst at GlobalData, said 2019 would be another successful year for Boohoo but warned UK growth could slow because of “the relative maturity of the brands”.

Despite Boohoo’s strong earnings report, its stock dropped nearly 10% in mid-January. The company seemingly still needs to convince investors of its growth potential, and allay concerns it may have over-committed itself in the US. Revenue growth missed analysts’ expectations by 3%.

However, the strong performance led the retailer to revise its growth forecast for financial year 2019 to 43%-45%, up from a previous estimate of 38%-43%.

“With earnings momentum remaining positive, we think the shares deserve to re-rate back to prior levels,” said Ben Hunt, an analyst at Investec. Citi analysts have calculated Boohoo’s updated guidance would ensure annual EBITDA of £80m, comfortably meeting expectations.

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