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boohoo - share price falls after allegations of poor conditions

Sophie Lund-Yates, Equity Analyst | 7 July 2020 | A A A
boohoo - share price falls after allegations of poor conditions

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Boohoo Group Ordinary 1p

Sell: 321.30 | Buy: 321.50 | Change -7.30 (-2.22%)
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A Sunday Times investigation has uncovered poor working conditions and low pay at one of the Leicester factories used to supply boohoo clothes.

boohoo has said the findings are "totally unacceptable", ceased all business with the associated company and begun an investigation.

The shares fell 22.9% on the day of the announcement.

View the latest boohoo share price and how to deal

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.

This model is an important part of the investment case, and is why recent news of poor working standards hit the share price. If the incident is an isolated one then resolution should be swift, and won't cause a long-term problem. However if this is a more widespread issue questions may be raised about boohoo's ability to buy its garments cheaply enough to sell at the bargain prices expected by its core customers.

Looking beyond the pandemic and recent headlines, international expansion is the key to future spoils. Acquisitions have 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 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.

We're a little less enthusiastic about the purchases of Karen Millen, Coast, Oasis and Warehouse. These names are more associated with mature shoppers and only time will tell if boohoo's influencer-led marketing will resonate.

Housing these additions and international expansion doesn't come cheap either- capital expenditure is expected to spike in the current financial year. That's fine if 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 continue to think boohoo has a strong operating model and opportunities for the future, although we remain mindful of the potential risks posed by recent allegations. A price to earnings ratio of 35.4 is lower than the average, but there is still scope for the shares to fall sharply if the group hits any more bumps in the road.

boohoo key facts

  • Current 12m forward price to earnings ratio: 35.4
  • Average 12m forward price to earnings ratio since listing (March 2014): 42.9
  • Prospective yield - boohoo doesn't currently pay a dividend

We've introduced this section in response to recent survey feedback - email us to let us know what you think. Please don't include any sensitive information, like account details.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Trading details (figures at constant exchange rates) 17 June 2020

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 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.

Find out more about boohoo shares including how to invest

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.