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boohoo - acquires remaining stake in Pretty Little Thing

Sophie Lund-Yates, Equity Analyst | 28 May 2020 | A A A
boohoo - acquires remaining stake in Pretty Little Thing

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Boohoo Group Ordinary 1p

Sell: 320.10 | Buy: 320.60 | Change -8.10 (-2.46%)
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boohoo is acquiring the remaining 34% minority stake in Pretty Little Thing (PLT), having bought a 66% stake back in 2017. The deal will cost £269.8m, but this could rise to £323.8m, if the boohoo share price averages 491p for 6 months between the deal closing and 14 March 2024.

The acquisition will be funded through a mixture of cash and new shares - these will be issued on 2 June 2020.

The shares rose 9% following the announcement.

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Our View

boohoo experienced disappointing sales as lockdowns swept around the world. But we think it's in a stronger position than a lot of its rivals.

For a start it can continue to trade when its high street counterparts can't. Sales in early April also improved year-on-year, which is no mean feat in the current climate. We suspect the group's cheap price tags have a strong part to play - why spend big on new clothes when no-one's around to see it?

Low cost items could also stand the group in good stead. Its affordable products should perform better in the face of squeezed discretionary spending. The retail industry is already fiercely competitive and continued discounting has seen gross margins come under pressure, but crucially operating margins are in double-digit territory.

All that means the group can stomach some disruption. But there's no denying these are tough times for all retailers. The extent of any sales slowdown depends how the economy and spending patterns shape up in the coming months.

Looking beyond the pandemic, international expansion is the key to future spoils. An opportunistic approach to acquisitions has helped here, with sales growing at an impressive rate. And we're supportive of plans to buy the remaining minority stake in Pretty Little Thing. Not only are these assets being picked up at a decent price, execution risk is reduced because the brand was already a part of boohoo's story. The decision to split the cheque between cash on hand and new shares limits the amount of dilution for shareholders too.

The shopping spree hasn't hurt boohoo's balance sheet either. The group will have £350m of net cash on completion of the deal, which offers a layer of protection in these uncertain times. It also means the group has the firepower to pounce on other acquisition opportunities to help its international ambitions.

It does however remain to be seen if the group can make a success out of the recently acquired Coast and Karen Millen brands - details are quite thin on the ground and they've only been contributing to group revenue since October 2019. The more mature customer base is a bit of departure for the group, and only time will tell if boohoo's influencer-led marketing will resonate with older shoppers.

There will be ups and downs from here, but we continue to think boohoo has some attractive qualities, and is well placed to capture demand. However, a price to earnings ratio, prior to today's announcement, of 51.9 means the market has high hopes too and the share price could fall hard if performance disappoints.

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Acquisition details

The initial sum of £269.8m will be partly funded by £107.9m of new shares. The first tranche will be worth £54m, and significant shareholders including senior management will be restricted from selling these new shares for 18 months. Another £54m worth of shares will be issued too, but there will be selling restrictions for two years.

A final £54m tranche of shares will only be issued if boohoo's share price averages 491p per share over 6 months between the deal closing and 14 March 2024.

A further £161.9m of cash from boohoo's balance sheet will be used to fund the rest of the deal. As at 29 February, the group had a net cash position of £240.7m, and immediately after the deal, the group will have access to £350m. That's helped by the fact the group has continued to generate cash in the last couple of months.

Since the initial majority acquisition of PLT in 2017, the brand has seen net sales rise 111% on a compound basis. Last year PLT had underlying after-tax profit of £47.2m. As a group, boohoo's net income to shareholders would have been £16m higher in the last financial year, had it included the profits attributable to the remaining 34% stake in PLT.

The group said it expects the acquisition will enhance earnings immediately.

Full Year Results (figures at constant exchange rates) 22 April 2020

Revenue rose 44% to £1.2bn for the full year ended 29 February 2020. Underlying cash profits (EBITDA) increased 50% to £126.5m, reflecting better efficiency and marketing, which saw margins rise.

Trading was strong at the end of the year, but coronavirus means performance was more mixed from mid-March. However, sales have actually improved year-on-year so far in April. The continued uncertainty means boohoo is unable to give financial guidance for next year.

In the UK, which accounts for 55% of revenue, sales were up 39% to £679.3m. In the USA there was a 61% increase to £263.6m, while Europe and Rest of World rose 62% and 19% to £188.4m and £103.6m respectively.

Across the brands, boohoo saw sales rise 39% to £600.7m, reflecting market share gains in key geographies. Gross margins decreased slightly as the group optimised its proposition. The second biggest brand, PrettyLittleThing achieved sales of £516.3m (2019: £374.4m). International markets performed very strongly. The USA remains Nasty Gal's biggest market, although growth in all markets was strong. That fed into a 109% increase in sales to £98.8m.

Newly acquired brands, Miss Pap, Karen Millen and Coast contributed almost £19m to revenue, and boohoo is pleased with their progress.

The group attracted 13.9m customers in the year, which is a 31% improvement on last year. The average order value now stands at £43.50 compared to £41.20 last year, with order frequency also increasing 5%.

Despite a reduction in gross margin to 54% from 54.7%, operating costs as a percentage of revenue decreased, helping EBITDA margins rise to 10.2% from 9.9%.

Capital expenditure was lower year-on-year at £45.6m (2019: £46.9m), which combined with higher profits meant free cash flow was 25.6% higher at £81.7m. Net cash stands at £240.7m.

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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.