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Trader’s Corner – Handbags at Dawn – 06-09-2019

Handbags at Dawn – fashion forward favourite eclipses rival with sales growth

Fashion-forward online retailer, Boohoo, has hit the spotlight this week, announcing stellar sales growth guidance for the year of between 33 and 38 per cent. Share prices soared by 15.37 per cent to 280.7p in the wake of the news. The teen favourite fashion site has been boosted by acquisitions of ailing brands Karen Millen and Coast to add to its existing collection, which includes Pretty Little Thing and Nasty Gal. Boohoo has seen its shares add more than 58 per cent to their value in the past year although its EBITDA margins for the year are expected to remain around 10 per cent, reflecting the cost of recent acquisitions. Boohoo’s growth is another win for online retail in the same week that traditional fashion stalwart Marks and Spencer has fallen out of the FTSE 100 for the first time since 1984.

By contrast, Boohoo’s rival ASOS has seen share prices fall over the last year to 2,472p at the time of writing. ASOS is expected to earn £30 million in profit this year which translates to a slim 1% profit margin and its quarterly growth revenue is 13.5%.

Analysts have attributed Boohoo’s growth to its ability to attract a wide range of on-trend brands at different price points. The on-line retailer has also successfully harnessed the power of social media ‘influencers’ and celebrities to promote its products, and the decision to offer clothing up to a size 20 has boosted its market share.

ASOS, on the other hand has been beleaguered by setbacks this year including a major Black Friday blunder last year and serious problems at warehouses in the US and Germany leading to a profit warning in July.

So how do the online rivals compare in the medium to long-term? Can Boohoo build on its success and deliver on investor expectations? Some analysts have concerns that its stock is overvalued despite the sales growth guidance and full-year expectations. Stock is trading at a price to earnings ratio of 49, which means earnings need to continue to grow at a rate of more than 30 per cent per annum. While this hasn’t been a problem for the past five years, there is the potential for Brexit and the recent brand acquisitions, which some consider to be too high-end to appeal to Boohoo’s customer base, to cause sales to stall, and investors could be the last to find out. Some think, though, that Boohoo’s established international presence and growth strategy will cushion it against Brexit risks and its double-digit EPS growth to-date gives it a good chance of continuing to out-perform its peers.

ASOS’s well-documented misfortune have led to it becoming one of the most shorted stocks on the FTSE 100 with an estimated 10% of its stock out on loan as traders try to profit from its woes. But some analysts believe it has potential for growth again if it delivers on its promise for international expansion and manages to ‘win’ Black Friday this year. In fact, it’s been suggested that if it achieves a third of its current UK sales in Europe and the US, ASOS could triple its £2.4 billion sales over the next ten years and for the less risk-averse investor, it might have the potential to deliver long-term.

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

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