Shares in ASOS (LSE: ASC) (NASDAQOTH: ASOMF.US) are up by 6% today, despite the online fashion retailer reporting a 10% decline in pre-tax profit. The reasons for the fall in profitability are the launch of zonal pricing and planned investment in international prices, which resulted in a decline in gross margins of 2.3% versus the comparable period last year. Despite this, sales are up by 14%, with customer engagement continuing to improve and, looking ahead, ASOS expects to report full-year results that are in-line with market expectations.
Strong Performance
Clearly, ASOS is adopting a strategy that is not only working well, but has the backing of investors. Certainly, it has experienced a number of difficulties in the past, including logistical issues in its international expansion and a warehouse fire that hurt sales in the short run. However, its policy of investing in international pricing seems to be increasing sales and, as long as ASOS is able to ‘wean’ itself off such investment so as to improve international margins, the outlook for its bottom line looks to be strong.
In fact, ASOS is forecast to increase earnings by 27% next year following an expected fall in net profit of 7% in the current year. This shows that the company is on the verge of exiting what has been a challenging period, and this could act as a positive catalyst on the company’s share price.
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Valuation
The problem for investors in ASOS, though, is that the company’s turnaround potential is already priced in. For example, ASOS trades on a price to earnings (P/E) ratio of 93.2 using the current year’s forecast earnings and, even when its P/E ratio is combined with its growth potential, it still equates to a sky-high price to earnings growth (PEG) ratio of 2.4. As such, even if ASOS does deliver as is currently expected (for which there is no guarantee), its share price performance could disappoint somewhat.
Sector Peers
That’s a key reason why other clothing retailers seem to be much more appealing than ASOS at the present time. For example, BooHoo.Com (LSE: BOO) offers a very similar opportunity to ASOS in terms of an online fashion operation that focuses on twentysomethings and operates within the UK and internationally. However, unlike ASOS, it trades on a PEG ratio of just 0.7, which indicates that its growth is not currently priced in and, as such, its shares are far more appealing than those of ASOS.
Similarly, while Sports Direct (LSE: SPD) is a very different business model to ASOS, it has international expansion plans and has an excellent track record of growth. And, following a fall in its share price of 30% over the last year, it now trades on a PEG ratio of just 0.9, which is less than half that of ASOS.
So, while ASOS is a great business, it trades at a very high price. As such, any disappointment from its future performance could lead to severe pressure on its valuation. As a result, Sports Direct and BooHoo.Com, which offer superior value to ASOS at the present time, seem to be the better buys.
