2016 has been a rather disappointing year for online fashion retailer ASOS (LSE: ASC). Its shares have fallen by over 10% and there could be further declines ahead due to its sky-high valuation. For example, ASOS trades on a price-to-earnings (P/E) ratio of 66.9 and while it’s a very high quality business that has a winning formula in terms of pricing, customer service and diversity, such a high rating is difficult to justify.
Certainly, ASOS is still very much a growth stock. Its bottom line is forecast to rise by 23% in the current financial year, but this puts it on a price-to-earnings growth (PEG) ratio of 2.9 and this indicates that its shares are relatively overvalued. ASOS has a refreshed strategy that seeks to focus on its core markets rather than chasing sales growth in new regions via a hefty investment in pricing. Yet it still lacks the investment appeal of rival consumer stocks such as Unilever (LSE: ULVR) and Burberry (LSE: BRBY).
Brand loyalty
A major reason for this is the brand loyalty that those two companies enjoy. While ASOS has its own line of clothing, a large proportion of the products it sells are branded goods. Therefore, to a large extent it’s a reseller of clothing. Even though its customer service is arguably better than many peers and it has a high degree of customer loyalty, that’s not as strong as the emotional attachment consumers have towards Unilever’s array of products or Burberry’s clothing.
This brand loyalty should allow Unilever and Burberry to deliver more resilient sales growth over the long run and also to expand margins at a faster rate than many of their rivals. That’s because consumers are often more willing to accept price rises for their most trusted and favoured brands.
And while both Unilever and Burberry are overcoming the challenge of reduced GDP growth in China, their exposure to the world’s second largest economy should provide them with impressive long-term growth prospects. That’s because Chinese consumers are forecast to enjoy rapid increases in income and are likely to demand more discretionary and luxury goods.
Attractive prices
Furthermore, Unilever and Burberry both offer better value for money than ASOS at the present time. For example, Unilever trades on a P/E ratio of 21.5 and Burberry has a P/E ratio of 19. While neither of these figures is exactly cheap when the FTSE 100 has a P/E ratio of around 13, both companies are on offer at a much lower valuation than ASOS.
While their growth potential in the short run may be in the high single-digits rather than the double-digits for ASOS, their track record of growth, brand loyalty and their long-term outlooks make Unilever and Burberry my preferred options in the consumer goods space.