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boohoo - April sales recover and more acquisitions in Q1

Sophie Lund-Yates, Equity Analyst | 17 June 2020 | A A A
boohoo - April sales recover and more acquisitions in Q1

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Boohoo Group Ordinary 1p

Sell: 62.08 | Buy: 62.24 | Change -1.78 (-2.78%)
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First quarter revenues rose 45% to £367.8m, excluding the impact of exchange rates. That reflects strong growth across all geographies, especially the US.

The group now expects full year revenue growth of around 25%, better than current market expectations.

Alongside the trading statement boohoo announced the acquisition of the online businesses, and all associated intellectual property, of Oasis and Warehouse for £5.25m.

The shares rose 9.3% following the announcement

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Our View

We think boohoo's in a stronger position than a lot of its rivals.

It was able to trade when its high street counterparts couldn't during lockdowns. And sales have continued to thrive. We suspect 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 hovering in double-digit territory.

That's helped by an incredibly supple supply and manufacturing process, which allows it to pivot its offering quickly depending on trading patterns and which items are prove popular.

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 has £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.

However, we're less enthusiastic about the other recent purchases. Snapping up UK brands like Karen Millen, Coast, Oasis and Warehouse is a departure for the group. These names are more associated with mature shoppers and only time will tell if boohoo's influencer-led marketing will resonate.

Getting ready to house all these additions and gear up for international domination doesn't come cheap either, and capital expenditure is expected to spike in the current financial year. That's all well and good so long as sales growth follows suit - if it doesn't then the added scale becomes a drag, rather than a benefit, for margins and profits.

Overall we're fans of boohoo's superior operating model, and its progress is difficult to knock. But a price to earnings ratio of 55.2 demands near-perfect execution of the group's ambitious plans, or the share price could fall sharply.

boohoo key facts

  • Forward PE ratio of 55.2
  • Average forward price to earnings ratio since listing (March 2014) of 42.8
  • boohoo doesn't currently pay a dividend

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Trading details (figures at constant exchange rates)

The biggest improvement in first quarter revenue came from the US, which reported an 83% rise to £92m. The UK, which is still the biggest region by sales, posted a 30% increase to £183m. In the Rest of Europe revenue was up 65%, reaching £63.4m, while Rest of World revenue rose 22% to £29.4m.

boohoo said there was strong underlying growth across the boohoo, Pretty Little Thing and Nasty Gal brands. More recently acquired names Karen Millen, Miss Pap and Coast have been integrated onto boohoo's platform and "continue to trade strongly".

Gross margins rose from 55% to 55.6%, helped by the group's flexible supply and manufacturing processes. This allowed it to react quickly when lockdowns hit, and categories like loungewear became more popular.

Oasis and Warehouse's online operations generated revenues of £46.8m in the last financial year, and will be integrated into the business over the coming months. boohoo is actively considering further acquisition opportunities, with a number of prospects "likely" to emerge in the coming months because of the challenging conditions.

The group finished the quarter with over £350m of net cash.

Looking ahead, full year underlying cash (EBITDA) margins are expected to be between 9.5-10%. This will depend on the extent of discounting in the sector as well as the effects of general trading uncertainty. Capital expenditure will be £60m - £80m, compared to £45.6m 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.

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