Why I'd buy this unloved 4% dividend stock over ASOS plc

N Brown
N Brown

ASOS(LSE: ASOS) has to be one of the most incredible stock market stories of the last decade. 10 years ago, investors could have picked up the shares for around 150p. Today, they hover around the 5,900p mark. I have no doubt that some investors were able to retire early on the back of those gains. Is there still time to get on board the growth story? Here's my take.

Buy what you know?

I'm a huge fan of ASOS myself and regularly buy clothes through the retailer. I'm a particular admirer of the £9.95 12-month next day delivery deal, which means I can order new clothes tonight, and they'll arrive tomorrow. How easy is that? So should I follow legendary US investor Peter Lynch's 'buy what you know' investment strategy and load up on the shares? I'm not so sure.

Sales growth at ASOS in recent years has continued to be strong. Indeed, over the last three years, sales have surged from £769m to £1,445m, a compound annual growth rate (CAGR) of 23%. Looking forward to next week's FY2017 results, City analysts expect sales to come in at £1,936m, a rise of 34% on last year. However, it appears that profits are not growing at the same rate as sales. For example, last year, operating profit and net profit came in at £42.1m and £24.4m respectively. Those figures are actually down from three years ago, when the company recorded numbers of £54.5 and £40.9m. Strong top line growth is not translating into increased profitability.

Turning to the valuation, ASOS trades on a high P/E ratio of 78 at present. That kind of valuation is quite risky in my view, as it doesn't leave a huge margin for error. So for now, I won't be investing.

4.2% dividend

One retailer that does potentially offer value right now, and could also benefit from two powerful demographic trends, is 'specialist fit' fashion retailer N Brown(LSE: BWNG).

It's no secret that the UK population is getting older. According to the Office for National Statistics, 18% of the population was aged 65 or older last year, up from 15.9% a decade ago. At the same time, the population is also getting larger. According to the UN Food and Agriculture Organisation, UK obesity levels have more than trebled in the last 30 years, with one in four British adults now classified as obese.

How can investors benefit from these trends? How about a retailer that caters for both an older and larger clientele? That's exactly what N Brown does, as it owns brands such as JD Williams that caters for over-50 customers, Simply Be offering women's plus-sizes and Jacamo, which offers men's clothing in sizes up to 5XL.

Half-year results released this morning look solid, with group revenue and online revenue rising 5.6% and 14% respectively. FX headwinds resulted in a 2% fall in EPS, however the group did maintain its interim dividend at 5.67p. Chief Executive Angela Spindler was upbeat about future prospects, commenting: "We are confident in our ability to deliver sustainable long-term growth and achieve our international ambitions."

With analysts forecasting full-year earnings of 22p, N Brown currently trades on a forward P/E ratio of 15.5. A dividend yield of 4.2% is also on offer. On those metrics, I believe the stock could be worth a closer look.

This stock could be the best of the lot

While N Brown looks to have long-term investment potential, I'd like to introduce you to another top growth retailer.

The Motley Fool report, A Top Growth Share, examines a retailer, that has seen its share price rise almost 20% in the last month alone.

To find out the name of this fast-growing company, for FREE, you can simply download your no-obligation report by clicking here.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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.