The fashion business is a risky one to be in for investors, as shareholders in ASOS (LSE: ASC) know only too well.
In an erratic start/stop pattern, the ASOS share price has soared to a peak twice now, and in each case it’s come crashing back down again. In 2011 it came close to £25 before losing half its value, but that was nothing compared to what was to come — we’ve seen a 2014 peak of over £70 crumble to today’s £25.14, leaving investors with a 65% loss since 10 January.
Price pressure
The latest mixed news came on 9 December from a Q3 update. Although UK sales were up an impressive 24%, international sales are lagging and margins are being squeezed as price competition hots up. The international situation is of particular concern. With the shares on a forward P/E of 56, earnings still need to multiply several times over — and that kind of growth just isn’t here in the UK.
Meanwhile, with international demand strengthening nicely and its rags commanding a high-fashion margin premium, Burberry (LSE: BRBY) has been having a great couple of months. We’ve seen a share price spike of 17% since mid-October to 1,652p, bringing in a more modest 12% rise over the past 12 months. In a year when the FTSE has been flat, that’s pretty good.
And unlike ASOS, Burberry has been steadily growing its earnings per share (EPS) — and though it looks like having a flat year to March 2015, growth is expected to resume after that. On a P/E of over 20, there’s clearly strong growth built into the price, but not in the same league as ASOS.
The best of the lot?
Then we come to NEXT (LSE: NXT), a contender for the UK’s best high street retailer, whose shares are up 21% over the past 12 months to £65.15. But that still leaves them on the lowest P/E of the three, of 16 based on January 2015 forecasts and dropping to 15 a year later. NEXT has put in five straight years of double-digit EPS growth, and we have further rises of 13% and 10% forecast for the next two years — that’s better growth over five years than ASOS!
ASOS’s success so far has been down to one thing — it got a high-quality web-based offering with sufficient capacity off the ground very quickly, and did it when many of its traditional rivals had barely noticed there even was an internet.
Advantage gone?
Web sites are relatively cheap to set up, and ASOS had to get its infrastructure right too. But the thing is, rivals like NEXT and Burberry already have the infrastructure in place, and both (especially NEXT) are ramping up their online sales.
I reckon ASOS has lost its first-mover advantage and is not going to get it back — and its rivals are going to shine in 2015.