Boohoo has overtaken rival ASOS to become the UK’s biggest online fashion retailer by market cap. Thanks to an association with Love Island, celebrity endorsements and growing sales, Boohoo now commands a valuation of £2.35 billion, compared to ASOS's £2.16 billion.
This valuation has been driven by investors sending Boohoo’s [BOO]
share price 29% higher this year. And while ASOS [ASC]
is also up on the year, its gains are a more modest 12%.
But since the start of May, it’s been a different story. Despite announcing impressive Q1 numbers, Boohoo's share price has slid 11% off the back of slimming margins. ASOS has fared even worse, dropping 35% over problems with its US operations and a near 90% plummet in profits in the first half of the financial year.
But there’s much to play for with the UK clothing market set to be worth £51.2 billion by 2023, according to a report from Global Data.
How do Boohoo's and ASOS's financials compare?
In their Q1 results, Boohoo's revenue jumped 45% compared to the same quarter last year, with profit margins at 4.41% and operating margins at 7.63%. ASOS’s growth wasn’t as spectacular, with revenues up 13.50% in Q1, while profit margins were 2.37% and operating margins 2.98%.
However, a closer inspection of Boohoo's gross margin shows that it actually fell 0.4% year-on-year. This is down to the mixed performance of its five brands, with PrettyLittleThing and Nasty Gal margins both falling almost 4.7%.
In the quarter, Boohoo's total debt pile stood at £7.6 million compared with ASOS's hefty £60 million. Debt-to-equity ratio for Boohoo comes in at 2.64, compared to ASOS's 12.69, potentially making ASOS a riskier proposition as its cash flow of £131 million (TTM), shows it is struggling to cover costs.
Boohoo shares' debt-to-equity ratio
Yet, in terms of market share, Boohoo still has a long way to go before it can overtake ASOS. Last year, ASOS's UK revenue hit £861 million with pre-tax profits of £102 million. This eclipses Boohoo's £374 million revenue and £13.6 profit. ASOS has also managed a huge 62 million orders, making Boohoo’s 13.6 million orders pale in comparison.
Will the US online fashion market trigger growth?
Both Boohoo and ASOS have a lot riding on the US online fashion market, which is expected to grow from $102.8 billion in 2018 to $145.7 billion by 2023, according to research website Statista.
In the States, Boohoo has found traction through the savvy use of social media, and celebrity endorsements. However, it will be hoping to turn around a slowdown in revenue growth in the market. This has gone from 81% last year to 66% in Q1 2019.
ASOS, on the other hand, will be looking to get its $40 million Georgia distribution centre fully operational after it struggled to keep up with demand in Q1. In the quarter, sales in the US fell by 3% to £77 million, so the company will be looking to make up for lost ground.
|PE ratio (TTM)||65.38||35.20|
|1yr target est||249.00||4,263.19|
Boohoo & Asos share price vitals, Yahoo finance, 10 July 2019
Who to back?
Boohoo's P/E ratio of 64.16 reflects investors’ lofty expectations for the stock, while ASOS’s 33.94 is closer to the industry average of 34.75. Price-to-book for Boohoo is again higher than its rival, coming in at 950.46 in the most recent quarter, compared to ASOS's 455.24.
For investors who think that Boohoo's market cap reflects the true worth of the company, the premium price might be justified. However, with such a hefty valuation relative to the company’s book, many traders may wish to wait until the divergence between price and company fundamentals, narrows.
Analysts have pinned a 950.46p average price target on Boohoo's back. This would represent a mammoth 356% upside if hit. ASOS carries an average price target of 4263.19p, which would result in a decent 66% upside on the current share price.
Last month Peel Hunt, Jefferies and HSBC all upped their price targets for Boohoo. ASOS wasn't so lucky, with UBS stripping its "Buy" recommendation on fears that opportunities in the US were overstated and that growth would need to come through cost cutting. Such cost cutting was in evidence this week when the company announced it would cull 100 jobs at its London headquarters.
Both are volatile stocks, with Boohoo's beta rating 2.56 over the past 3 months, and ASOS's 2.03. For traders, this could mean opportunities to take short-term profits. While those looking for longer-term value might have to hold their nerve.