Forget about Boohoo.Com plc, here’s a fashion stock that could trounce it in 2018
Online fashion retailer Boohoo.Com (LSE: BOO) gave us a trading update Thursday, and it was everything that a growth investor could possibly want. Revenue for the 10 months to 31 December (that’s since its last year-end in February) just about doubled — up 103%, or 97% at constant exchange rates.
The bulk of revenue, £299m, came from the UK, but the USA delivered a 129% boost to £79.2m, while sales from the rest of Europe climbed by 77% and the rest of the world by 68%.
So why is the share price down 2%, to 203p?
It’s almost certainly because massive growth like this is already built in to the share price, as happens with many high-flying growth shares in their early days. We’re now looking at an eye-watering P/E multiple of 74 for the year ending February 2018.
Expectations too high?
Some brave investors aren’t worried and see Boohoo as a buy for 2018. But when I consider that it would take a five-and-a-half-fold increase in earnings per share to get that P/E down to the long-term FTSE 100 average of around 14, I see it as unnecessarily risky.
It also strikes me that the share price chart looks very similar to that of ASOS in its early days, and that crashed back down after its early bull run. And ASOS is actually back up to a P/E of 71 again, which I find equally scary.
There’s also only a limited time for online-only companies to cement their early-mover advantage before regular retailers get in on the act. And with the fashion business being known for its fickleness, I don’t see any reason why shoppers won’t switch suppliers at the drop of a hat.
Bricks and mortar advantage
In fact, with its interim results released in September, Next (LSE: NXT) touched on that very point, dismissing fears that retail stores are set to disappear long-term as the world moves to online shopping. The company gave two reasons.
One is that it believes its stores will “remain profitable and strongly cash generative for many years to come.” The other is that they’re complementary to online shopping and allow customers to collect and return orders in-store. I see the stores as a long-term competitive advantage.
Last week’s Christmas trading update was better than expected too, with the year to 24 December seeing a 7.2% decline in full-price retail sales. Added to a 10.4% boost for online sales, the result was an overall 0.2% rise.
Next has also revised its guidance for the full year to January, upping its anticipated pre-tax profit to £725m from a previous figure of £717m. Earnings per share are now expected to drop by a modest 5.7%, better than earlier predictions of 6.8%.
The shares picked up a bit on the day of that update, and we’re now looking at a 7% recovery since December’s low point, to today’s 5,018p. That implies a P/E of 12, which I find a good deal more appealing than Boohoo’s inflated multiple.
I reckon we’re facing a few years of tough economic conditions and that the whole retail sector is going to be squeezed quite hard. But that hands an advantage to the best in the business, which are better placed to come out of hard times in a superior position.
I do see Next as one of the best, and I think the shares are a ‘buy’ at today’s depressed levels.
Solid long-term growth
I see growing earnings for both Next and Boohoo, though I’m bearish about Boohoo’s share price. But if you do take that kind of risk, I reckon it’s good to offset it with a safer growth stock at a more sustainable price level.
The company selected in our Top Growth Share From The Motley Fool report has already provided handsome rewards, and our analysts think it has a lot more to give.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.