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Forget ASOS, I think Joules is a better Brexit bet

Kirsteen Mackay
Hand drawing a red line between the UK and the rest of EU, Brexit concept.

ASOS (LSE:ASC) has been a stock market darling of the AIM exchange in times gone by, but it suffered a catastrophic 70% share price drop in 2018.

The growing online fashion market is estimated to be worth more than £220bn. With time, it is likely that ASOS will be well placed to capture more of this in its international markets.

However, hope doesn’t lift the share price and its second profit warning in seven months, screams ‘avoid’, I think. The update reduced the company’s pre-tax profit forecast to £30m-£35m, massively down from a previous estimate of £55m. An immediate sell-off followed this news, dropping the share price by 23%.

ASOS is nearing the end of a planned infrastructure and technology overhaul of its US and European warehouses. Unfortunately, this has not gone as smoothly as hoped and various disruptions have drawn out the process, affecting inventory levels and its ability to meet demand.

But UK sales have grown 16%, which is impressive with all the Brexit uncertainty affecting retailers. So can it recover to its previous highs? I think it’s possible, but it’s unlikely to be soon.

Growing product range

Joules (LSE:JOUL) is very different and its appeal seems resilient even with Brexit-induced consumer caution. Its brand style very much smacks of the middle-class country lifestyle, but this appeals to a wider sector of society and is popular with urbanites/suburbanites too. The bright colours, good quality fabrics and simple, but not boring, designs make these clothes perfect for children and adults alike. It is famous for its wellies and now also sells pet beds, kitchen textiles, bedding, stationery and radios.

The business was founded by Tom Joule 30 years ago when he began selling polo shirts and wellies at agricultural shows. He then progressed to mail order, and the company floated on the London stock exchange in 2016. It continues the mail-order business, both via catalogue and online, and has 125 shops in the UK and is growing abroad with international sales now contributing 16% to the business.

Positive year-end results

Yesterday, the company posted its full-year results to the end of May, with an impressive 17.2% rise in sales to £218m. Pre-tax profits also rose by nearly 15% to £12.9m. It made £1.8m in licensing fees, which is a 147% increase on the year before and free cash flow increased to £8.7m from £0.1m.

The share price took a dip after the news, possibly because of a drop in the gross margin from 55.7% the year before to 54.8%. Also, a management change is afoot with chief executive Colin Porter, stepping down in September to take up the role of Chairman at Moss Bros. Former Asda director Nick Jones will replace him.

Joules has a 50% debt ratio, which is high, but down 10% from last year. It also has a dividend, but with a minuscule 0.8% yield, it is barely worth mentioning. The price-to-earnings ratio (P/E) is 19, down from 29 at the end of May 2018. This is not too far off the average P/E of 15. 

Joules is circumnavigating the choppy seas of Brexit, as is its high street contemporary Next, so it seems fortuitous that these two have joined to create a formalwear range, including suits, shirts and smart blazers for men.

With Joules’ resilience to tough trading conditions and wide product offering continuing to please consumers, I consider Joules a buy.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS and Joules Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019