British clothing retailers are struggling. Should I buy boohoo or ASOS? (ASOMF) (BHOOY) | Popgen Tech
boohoo group (OTCPK:BHOOY) and ASOS (OTCPK:ASOMY) have come to represent two unfortunate trends. The first is the relative discount of UK equities compared to US markets. Second is the collapse of listed e-commerce companies recession from the trade highs caused by the pandemic. boohoo currently trades with a market capitalization of £463m against revenue of 882 million pounds for the most recent reporting period, covering the six months to 31 August 2022. ASOS has a market capitalization of £518m against revenue of 950 million pounds over the same period of time. boohoo’s performance since my last review has been beset by controversy, the pandemic and the collapse of UK shares amid the country’s economic situation.
Amid a surge in sales caused by the pandemic, reports that the company underpaid garment workers at its UK factories contributed to its share price slump. In many ways, boohoo has never recovered from this due to consumer boycotts, petitions and attempts to ban clothing imports into the US – all events that have contributed to its current low profits. boohoo soon paid $100 million in damages earlier this May in response to a California lawsuit that accused the retailer of using false promotions to mislead shoppers.
Meanwhile, ASOS is struggling with £474.5m of debt and is in talks with its lenders to add a restructuring expert. It caps a torrid year that has seen the company, once the darling of the UK stock market, collapse to the point where it has given back almost all of the profits and wealth it has created for shareholders since going public.
Fashion retailers are going from stock market darlings to losers
How did both companies end up in this position? A marked shift in sentiment towards fast fashion and the decline of the ESG totem pole. boohoo has essentially been accused of modern day slavery due to parts of its supply chain paying workers below the UK minimum wage.
To say that this caused significant reputational damage to boohoo would be an understatement. Some large institutional investors have closed their positions, while many others have written off the company as an investment, citing apparent governance and ethical deficiencies. Although the company has addressed the issues and fixed the supply chain, the legacy of this still remains. I closed my boohoo position on the back of the news.
ASOS currently trades at 0.13 times trailing 12 month revenue of £3.94 billion, while boohoo trades at 0.2 times trailing 12 month revenue. This compares to an average multiple of 0.6x.
Importantly, this is also a significant discount to similar US-based fast fashion retailers such as Urban Outfitters ( URBN ) and to the broader US consumer sector. They have price-to-sales multiples of 0.50x and 0.81x, respectively.
Collapse of sentiment like a recession
At boohoo, adjusted EBIT fell to £9.6m from £64.2m in the same period last year. The 85% year-over-year decline was due to investments in the company’s multi-brand platform, freight and logistics inflation, weaker-than-expected consumer demand and the broader macroeconomic environment. This mirrored ASOS, which saw its adjusted EBIT margin fall 420 basis points to 1.1% from 5.3% in the year-ago period.
So while the two may be competitors, they fundamentally both face the same headwinds and short-term risks from inflation and a rapidly weakening macroeconomic environment. Real incomes are falling in the UK and the US, their main markets, and inflation is not expected to fall close to the central bank’s target rate until the second half of 2023. Their malaise is compounded by the emergence of new competitive threats with Shane and a number of Chinese fast fashion companies gaining market share. It is this precipitous collapse in sentiment that will need to be corrected for both stocks to return to positive returns. This is unlikely when the global economy is in recession. Consumer sentiment is one of the most sensitive areas to poor economic growth.
Even though I sold out of my bull position, I was always thinking about going back. However, there will be a long-term threat from the divergence of fast fashion from the main ESG goals related to sustainability. It’s becoming increasingly clear that cheap, mass-produced clothing that deflates quickly and needs to be used and thrown away after a few uses is not a sustainable practice. According to the UN, the global fast fashion industry is the second largest consumer of water and is directly responsible for 10% of global carbon emissions. This has put both brands increasingly at odds with younger consumers, mainly Gen Z, who are moving towards reuse and the circular economy to meet their clothing needs and are flocking to second-hand clothing apps like Depop.
So are boohoo and ASOS cheap? Yes, very cheap, especially compared to their previous highs. But they are both likely to remain cheap, especially with the recession expected next year. It’s hard to recommend anything as a purchase against this one.
Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Be aware of the risks associated with these stocks.