The two Boohoo (LSE: BOO) share price and Asos (LSE: ASC) the stock price has fallen over the past year. Indeed, in this year, Boohoo is down over 45%, while ASOS is down just over 40%. But in the face of these massive drops, would I buy either of these fashion stocks?
ASOS: growth potential
After skyrocketing due to the pandemic and the shift to online shopping, ASOS has struggled in recent months. This is due to several short-term headwinds the company faces, including pressures from the supply chain. Such headwinds mean that sales growth is only expected to be between 10% and 15% for fiscal 22, much slower than in previous years. In addition, costs are also likely to skyrocket. This includes higher inbound freight costs, inflation in labor costs, and increases in marketing costs. As such, pre-tax profit is only expected to be around Â£ 125million, down 30% from this year.
Yet despite these risks, I am confident in the long-term future of the group. Indeed, the group is targeting Â£ 7 billion in sales over the next three or four years, with operating margins of at least 4%. That’s significantly higher than the Â£ 3.9bn it recorded this year.
Additionally, I believe there is significant demand for ASOS products, especially as the pandemic has further strengthened online shopping as a way forward. With the company aiming for growth in the United States, there is significant growth potential there as well. With Â£ 200million in net cash, slightly above Boohoo’s Â£ 100million, the company should also be able to seize any opportunities. This means that I would buy ASOS shares at their current price and hold them for the long term.
Boohoo: supply chain issues
Boohoo’s share price has also struggled and is currently at levels not seen since late 2018. This despite the company having reported sales of Â£ 580million in 2018, up from Â£ 1.75 billion last year. Nevertheless, such a fall can be attributed to several main reasons. First, there was the ‘modern slavery’ investigation last year, in which it was found that some workers (not directly employed) in its supply chain were being paid as little as Â£ 3.50 of time.
While he does make changes, it will likely come at the expense of the company’s already slim profit margins. In addition, there is significant competition from Chinese group Shein, which forecasts a turnover of Â£ 14.6 billion next year. It can drive customers away from Boohoo. It is also a risk for ASOS. Finally, he recently reported an additional Â£ 26million charge related to increased shipping costs, which may mean profits are falling behind expectations.
But compared to previous years, Boohoo’s stock price looks extremely cheap. In fact, it is currently trading at a forward price-to-sell ratio of 19. Last year it traded at a P / E ratio above 50. It is also slightly lower than ASOS, which has a P / E around 22. As such, now may seem like a great time to buy stocks. Despite everything, I stay away for the moment. This is because I am worried about the poor environmental standards of the company, which are considered to be much worse than those of ASOS. I think it could have a negative effect on the business in the long run.
Stuart Blair has no position in any of the stocks mentioned. The Motley Fool UK recommended ASOS and the boohoo group. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.