BHOOY - British Clothing Etailers Are Struggling Should You Buy boohoo Or ASOS?

Summary

• Boohoo and ASOS are both struggling to adapt to the post-pandemic world of fast fashion eCommerce sales with common shares of both down markedly over the last three years.
• Both companies are still profitable, albeit at reduced levels.
• Continued economic headwinds will come from high inflation and rapidly declining real incomes.

boohoo group ( BHOOY ) and ASOS ( ASOMY ) have come to represent two unfortunate trends. The first is the relative discount of UK equities compared to the US markets. The second is the collapse of listed eCommerce companies on the back of a comedown from their pandemic-induced trading highs. Boohoo now currently trades on a market cap of £463 million against revenue of £882 million for its last reported period covering the six months to the 31st of August 2022. ASOS sports a £518 million market cap against revenue of £950 million for the same time period. Boohoo's performance since my last review has been beset by controversy, the pandemic, and the collapse of UK equities on the back of the country's economic environment.

Amidst a pandemic-driven surge in sales, reports that the company was underpaying garment workers at factories in the UK contributed to its share price tanking. In many ways, boohoo has never really recovered from this with consumer boycotts, petitions, and an attempt to prevent the imports of its clothing to the US -- all events that have contributed to its current low revenue multiple. Boohoo would soon payout a $100 million settlement earlier this year in May in response to a California lawsuit which accused the retailer of using fake promotions to mislead shoppers.

ASOS on the other hand is grappling with borrowings of £474.5 million and has held talks with its lenders on adding a restructuring expert . It tops off a torrid year that has seen the company that was once a darling of the UK stock market collapse to the extent that it has given back almost all the gains and wealth it created for shareholders since becoming a public company.

Fashion Etailers Swing From Stock Market Darlings To Losers

How have both companies found themselves in this position? A marked change of sentiment towards fast fashion and a decline on the ESG totem pole. boohoo was essentially being accused of modern slavery due to some parts of its supply chain paying workers below the UK minimum wage.

To state that this caused significant reputational damage to boohoo would be an understatement. Some large institutional investors closed out their position with many more writing off the company as an investment citing the glaring governance and ethical shortcomings. Whilst the company has settled the issues and corrected its supply chain, the legacy of this still lingers. I closed out my boohoo position on the back of the news.

ASOS currently trades at 0.13x its trailing 12-month revenue of £3.94 billion whilst Boohoo trades at 0.2x its trailing 12-month revenue. This compares to a peer average multiple of 0.6x.

It's important to note that this is also a material discount to similar US-based fast fashion retailers like Urban Outfitters ( URBN ) and the broader US consumer discretionary sector. These have a price-to-sales multiples of 0.50x and 0.81x respectively.

A Collapse Of Sentiment As A Recession Looms

boohoo saw its adjusted EBIT drop to £9.6 million from £64.2 million in the year-ago period. The 85% year-over-year drop was blamed on investments made on the company's multi-brand platform, freight and logistics inflation, weaker than anticipated consumer demand, and the broader macroeconomic environment. This was mirrored by ASOS which saw its adjusted EBIT margin fall by 420 basis points to 1.1% from 5.3% in the year-ago period.

Hence, whilst both might be competitors, they fundamentally both face the same headwinds and near-term risks from inflation and a rapidly weakening macroeconomic environment. Real incomes have been dropping in the UK and US, their core markets, with inflation not expected to fall close to the central bank target rate until the second half of 2023. Their malaise has been compounded by the emergence of new competitive threats with Shein and a number of China-based fast fashion companies increasingly taking market share. It is this rapid collapse of sentiment that will have to be corrected for both shares to deliver positive returns again. This is unlikely to happen with the global economy staring at a recession. Consumer discretionary is one of the most sensitive areas to poor economic growth.

Whilst I sold out of my boohoo position, I always considered buying back in. However, there will be a longer-term threat from the divergence of fast fashion from basic ESG targets around sustainability. It's become increasingly clear that mass-produced cheap clothing pumped out quickly and to be used and discarded after a few uses is not a sustainable practice. According to the UN , the global fast fashion industry is the second-biggest consumer of water and is directly responsible for 10% of global carbon emissions. This has placed both brands increasingly at odds with younger mainly Gen Z consumers who are moving towards reusability and the circular economy to meet their clothing demands and have flocked to used clothing apps like Depop.

Hence, are boohoo and ASOS cheap? Yes, extremely cheap especially when compared to their previous highs. But they will both likely stay cheap, especially amidst recessions widely expected next year. It's hard to recommend any as a buy against this.

For further details see: