Fashion has long been a part of human history. How we dress is often attached to our identity, how we feel and our human psyche as a whole. However, it wasn't until the industrial revoluton that fashion transformed from something made in homes and small stores to something mass-produced. In more recent times, “fast fashion” has become immensely popular as this enables “catwalk” inspired fashion to be purchased fast and at low prices thanks to the power of e-commerce. Fast fashion had a major boom in 2020 as physical retail stores shut down and people shopped online more often, leading to new competitors appearing left and right. However, since 2021, high inflation and supply chain constraints have crushed the weaker cogs of the fast fashion market. Thus, in this article, we will take a look at two butchered British fast fashion stocks which I believe could rebound in the long-term despite their near-term profitability struggles; let’s dive in.
1. Boohoo Group PLC
Boohoo Group PLC (LSE:BOO, Financial)(BHOOY, Financial) is a U.K.-based fast fashion company which owns popular brands such as PLT, Nasty Gal and boohooMan. During 2020, the company was in a formidable position as its loungewear products saw record sales, mainly driven by the rise in remote working.
The company’s management was “greedy when others were fearful" and made a series of acquisitions of key competitors. For example, in January 2021, Boohoo snapped up the liquidated department store retailer Debenhams for £55 million ($68 million) with the exception of its 118 stores. The business then relaunched this brand purely online, in order to take advantage of its 1.4 million beauty club members. For those outside the U.K., you may not be familiar with the brand Debenhams, but it is similar to the department store Sears in the U.S., which also shut down for similar reasons.
Financial challenges
Boohoo was previously regarded as a “high growth” company, but over the past couple of years, its growth has slowed down substantially. For the fourth quarter of 2022, the company reported £638 million in revenue, which was actually down 11% year-over-year. A silver lining is its revenue is still up an incredible 35% since the fourth quarter of 2019.
Another positive is for the full year of 2022, the company reported a substantial £1.9 billion in revenue, up 14% year-over-year on a constant currency basis.
I think the recent quarter's decline is due to the cyclical pullback in the e-commerce market after a major boom in 2020, as well as economic struggles. Even the heavy hitters such as Amazon (AMZN, Financial) are feeling similar effects.
More specifically to Boohoo, the company is also facing heavy competition from China-based rival Shein. Shein was originally brushed off as not a threat, but it's clear this Chinese rival has grown to become a mammoth of the industry. By November 2021, the company’s valuation jumped to $15 billion and by the third quarter of 2022, its valuation rose to a staggering $30 billion. Given Boohoo’s valuation has fluctuated between $1 billion and $3 billion over the past couple of years, the size difference is immense.
A positive for Boohoo is it should have the advantage of being more in touch with Western audiences. The company was a pioneer in influencer-based social media marketing and has scored many incredible celebrity connections from Jennifer Lopez to Paris Hilton, Nikki Minaj and more.
The main challenge the company is facing is its profitability. For the full year of 2022, Boohoo reported an adjusted Ebitda margin of 6.3%, or £125 million, which is down from the 10%, or £174 million, reported in the full year of 2021.
This was mainly driven by record-high shipping costs and overall cost inflation. Many of the products shipped to its U.S. consumers had to be sent via chartered jets, given the previous bottleneck at U.S. ports. Given the company sells dresses for as little as £5, it’s a business that is extremely sensitive to margins.
As a shareholder of Boohoo, I personally believe the company should raise its prices in order to improve its margins, then position its brands as slightly higher end. I believe as supply chains pressures ease, inflation falls and the company opens its U.S. distribution center, its margins should improve.
Valuation
Boohoo is trading incredibly cheap with a price-sales ratio of 0.38, which is 80% cheaper than its five-year average.
2. ASOS PLC
Another British fashion stock I like is ASOS PLC (LSE:ASC, Financial)(ASOMY, Financial), a fast fashion e-commerce company with worldwide operations.
This business has a different offering to Boohoo in that it stocks 850 brands from other clothing manufacturers on its website, as well as its own ASOS DESIGN Brand. In general, I would say its branding and influencer marketing is less innovative than Boohoo. However, the company offers a consistent service, with clothing at a range of qualities, which helps to evoke an extremely loyal customer base.
As a customer of ASOS, I find its no-nonsense approach to be enticing and the ability to get high-end brands at attractive prices can also be a nice bonus. For example, I found many Ralph Lauren outfits on its website and even Versace sunglasses.
Financial challenges
ASOS reported £1.336 billion ($1.6B) in revenue for the fourth quarter of 2022, which declined by 3% year-over-year. This is excluding the impact of its exit from Russia and on a constant currency basis.
This was mainly driven by lower consumer demand in the e-commerce sector, with the U.K. part of its business reporting an 8% year-over-year decline in sales to £591.3 million.
Its Rest of Europe sales were actually up by 6% year-over-year to £417 million, which was driven by price increases and a favorable mix of basket items which helped margins. U.S. sales dipped by just 2% due to lower wholesale retail sales.
Overall, its active customers were a staggering 25.5 million, which was flat year-over-year.
Similar to Boohoo, ASOS has faced challenges with its profitability. The company reported an operating loss of £9.8 million for the full year of 2022, which was down substantially from the £190.1 million profit reported in the full year of 2021.
A positive is ASOS has announced a number of initiatives to address this issue. This includes the removal of 35 “unprofitable” brands from its portfolio and the closure of three extra storage facilities in the U.K., Europe and the U.S. In addition, it has made a staffing cut of 10%. These initiatives are expected to save the company approximately £300 million for the full year of 2023, with £100 million in free cash flow expected to be generated.
Valuation
ASOS trades at a price-sales ratio of 0.21, which is 76% cheaper than its five-year average.
Final thoughts
Boohoo and ASOS are two leading British fast fashion companies. Both businesses experienced huge gains from the lockdowns of 2020 and are now facing a cyclical pullback in demand. I believe this is only a short-term industry issue, and the main challenge for these businesses is increasing profitability and giving confidence to investors that their business models are sustainable in a high-inflation environment.
