On the face of it, they could hardly be more similar. Fast-fashion pioneer Asos (ASC) and fast-fashion upstart Boohoo (BOO) are both online apparel retailers who have leveraged – and in many ways driven – the move away from high-street fashion shopping to their own great profit. Asos was founded six years before Boohoo, and has enjoyed astronomical share price growth since its initial listing in 2001 for just 20p, but over the past year and a half it has seen its share price fall to as little as a third of its early 2018 highs of around 7,600p. Boohoo, meanwhile, seems to be going from strength to strength, with a strong sales performance driving earnings upgrades from analysts and acquisitions signalling a move into potentially lucrative new customer demographics. So what is causing the divergence?
Boohoo’s latest trading update revealed the group’s performance had been stronger than expected in the first half of the financial year, prompting management to increase its guidance for sales growth to 33-38 per cent, from 25-30 per cent previously.
The announcement came shortly after the group announced it had bought the brands and online operations for Karen Millen and Coast out of administration. The deal was notable in that the decision not to buy any of the brands’ stores marked an attempt by Boohoo’s management to reestablish an existing high-street brand as on online-only prospect. The brands also typically target customers aged 25 or above, a departure from Boohoo and its associated brands’ typical 16-25 target demographic.
The reasons for Asos’s fall from grace are manifold. In December last year, the group reported a “significant deterioration” in trading for the crucial month of November, necessitating a reduction in sales growth guidance to 15 per cent for the year to August 2019 from 20-25 per cent previously. This, combined with logistical issues in the US and investments in upgrading technology and distribution, led the group to report pre-tax profits down 87 per cent in the first half of the year. Margins also suffered due to a high level of discounting. Then, further warehouse issues in the US, along with troubles with the US rollout, led to another profit warning in July. Those recurring operational issues have understandably dented confidence in management.
Part of the divergence can be explained by the relative maturities of the two businesses. Asos is older, and while Boohoo has until now been able to rely on its core market to deliver stellar growth rates, Asos – which has annual sales roughly triple the size of Boohoo’s – is less able to do so. Its compound annual growth rate over the past four years was 25.7 per cent, while Boohoo’s was more than double with 57.3 per cent. Asos has still been delivering growth rates that would be impressive by most standards, but the market has grown more circumspect about whether that can continue, judging by the drop in the share price as a multiple of forecast sales.
