“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” said Warren Buffett, famously. I couldn’t possibly disagree, but I think either of those is better than buying any company at too high a price.
That’s what’s kept me away from high flyers like Boohoo.com (LSE: BOO), whose shares have exhibited a kind of growth share ascent that I’ve seen come tumbling down many times over the decades. With everyone piling in, the shares were pushed as high as 328p at one point — and anyone unlucky enough to buy at that peak is now sitting on a 50% loss.
The questions now are how far will the fall go, and what kind of sustainable level will be supported by Boohoo’s long-term future earnings? Right now, looking at a forward P/E of almost 62, I think there are further falls to come — though things are looking a bit better than when I looked at its January update, when that same multiple stood at 74.
Once bitten
A mistake I’m not going to make with Boohoo.com is one I did make with ASOS, and that’s to have doubts about its business model. I saw the buying of clothes as something that people would surely want to do in the flesh, feeling and trying stuff on before buying. But I reckoned without the ease of buying lots of stuff and sending back what you don’t want, and that’s increasingly the way followers of fashion are doing it.
I’m sure Boohoo.com has a great future, but I think short-term expectations are too high. Forecast EPS rises of 25%-30% per year suggest PEG multiples of around two, which is about twice the figure that I’d consider good value.
Track record
I much prefer NEXT (LSE: NXT) as an investment in the fashion retail business, based largely on its proven track record of generating profits thanks to excellent management.
Friday’s full-year results are testimony to that, as the high street chain put in a set of figures that beat forecasts. We’re in a tough time for the retail business, but total revenue fell by only 0.5% on last year. Full-price sales did fall 7% on the year and that led to a 5.6% drop in earnings per share to 416.7p, but that was better than expected.
The big measure of NEXT’s success is surely its cash, as chairman Michael Roney said: “Despite difficult trading conditions, cash flow remained strong and we returned £586m to shareholders.” That’s through a combination of dividends and share buybacks, and 158p in ordinary dividends plus 180p in specials made a total of 338p. That’s an overall yield of 6.8%, even after the share price climbed 7% in response.
Online success
Crucially for the future, full-price online sales rose by 11.2% with total online sales up 9.2%.
While we’re in acknowledged hard times for the high street, NEXT shares have still gained 10% so far in 2018, while Boohoo shares are down 23%. I see that as a return towards rationality regarding their respective long-term valuations.
If you think online selling is the future (which it surely is), NEXT is also selling in the same space as Boohoo.com and doing well at it. And at a much lower share price valuation, on a P/E of only around 12.