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Boohoo - Stellar growth across the board

Nicholas Hyett | 25 September 2019 | A A A
Boohoo - Stellar growth across the board

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Boohoo Group Ordinary 1p

Sell: 170.20 | Buy: 170.45 | Change 5.20 (3.15%)
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Boohoo announced first half revenue growth of 43%, reaching £564.9m. Underlying operating profits rose 45% to £51.2m, with a slight improvement in margins reflecting improved efficiency, targeted marketing and benefits of scale.

Improved full year guidance - issued earlier this month - remains in place.

The shares rose 3.9% in early trading.

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Our View

boohoo's combination of popular collections and cheap price tags has cooked up a storm. We can't really knock its performance.

An exclusively online presence means the group can stock small quantities of lots of different styles, and ramp up marketing and stock for the most popular. This 'test and repeat' model means boohoo is ideally placed to keep up with the frantic pace of fast fashion. An online model also means expansion is easier than a bricks and mortar retailer, which helps boohoo pursue growth at a snappy pace.

The opportunistic approach to acquisitions is also a point in the group's favour, with the likes of PrettyLittleThing and Nasty Gal meaningfully boosting sales since they were bought in 2017. While recently launched MissPap is a similar proposition, it'll be interesting to see how Karen Millen and Coast fare.

The more mature customer base is a bit of departure for the group - which has so far been squarely aimed at teenagers and those in their early 20s. It's a potentially lucrative market if the group can crack it, but only time will tell if boohoo's influencer led marketing will resonate with older shoppers.

All that potential comes at a price though. The shares currently change hands for a lofty 44.9 times expected earnings, requiring near-perfect execution. A lot is expected from the US market in particular, and historically it's been a bit of a graveyard for UK retailers. One stumble could knock the shares hard.

So far all the group's brands have been able to grow in sync, but cannibalisation is an ever present danger. There are other risks to rapid growth too. boohoo's managed its expansion well so far, but bigger rival ASOS has struggled with new infrastructure projects throwing up unexpected costs. Boohoo will have to navigate similar hurdles as it grows.

All-in-all, it's hard not to be impressed by boohoo's performance - especially given the economic malaise that's hit rival retailers. Sales are racing, and if the group can deliver expansion plans and keep growing the international business fast enough to satisfy bullish investors profits could continue to grow.

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Half Year Results

Revenue growth was spread across all the group's brands, with particular strength in the US and Europe. Active customers rose 30% to 13m, with all the key order metrics improving including; order frequency, conversion, order value and number of items per basket.

boohoo brand sales rose 35% at constant exchange rates to £281m. Gross margins in the business improved to 53.6% thanks to an improved product offering and refined proposition - with the group's first recycled fashion line introduced during the period.

PrettyLittleThing revenues rose 41% to £237.6m, with the US and French markets performing particularly well. Gross margins slipped from 57.3% to 55.3%.

Sales under the Nasty Gal brand rose 148% to £43.9m, with significant growth in the US market (the brand's largest), and "exceptional" growth in the UK and Internationally.

The recently acquired MissPap brand launched in April, with good early trading, while the Karen Millen and Coast brands expected to go live in October.

Boohoo reported capital spending of £6.4m in the first half, with a further 19.4m spent on the acquisition of new brands. Automation of the Burnley distribution centre completed in April.

Operating cash flows during the first half were steady at £55.9m, although lower capital expenditure meant free cash flow rose 22% to £30.1m. The group finished the half with net cash of £207.4m, up from £155.6m this time last year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.