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Boohoo - Sales and profits boom, but some nerves too

Nicholas Hyett, Equity Analyst | 30 September 2020 | A A A
Boohoo - Sales and profits boom, but some nerves too

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Boohoo Group Ordinary 1p

Sell: 63.24 | Buy: 63.56 | Change -3.12 (-4.69%)
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boohoo reported a 44% increase in first half revenue at constant currencies, reaching £816.5m. That reflects particularly strong sales in the US and internationally. Improvements in both gross margins and operating margins meant underlying operating profits rose 54% to £79m, with earnings per share up 43%.

Economic uncertainty is expected to impact sales in the next six months. The group is also planning for some increased costs in the second half - such as return rates returning to normal levels and increased delivery costs in some markets.

The shares rose 3.0% in early trading.

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Our View

Boohoo's sales have boomed again this year. The closure of high street rivals will have been a useful boon, but we suspect the group's cheap price tags have also served as a booster - why spend big on new clothes when no-one's around to see it?

Affordable products should perform better in the face of the economic slowdown too. That's good because management are worried about "a period of economic uncertainty" in the second half and "possible reduced consumer spending".

There are other near term headwinds. Returns fell substantially at the peak of the lockdown - and since then have started to rise. Since returns represent a straight forward loss, as well as being operationally complex, that will weigh on margins in the second half. The decline in global air traffic, and decline in shipping capacity, is also increasing the cost of delivering product to some of the group's overseas customers, impacting the profitability of growing global sales.

We still think Boohoo is pretty well placed though. The fact growth in UK sales growth accelerated in the second quarter, despite the working practices scandal engulfing Boohoo's Leicester based suppliers, is testament to strength of the group's brands and increasing demand for online retail.

The group has managed to keep operating margins within touching distance of double-digits, better than rival online clothing retailers. That's helped by a supple supply and manufacturing process, which allows it to pivot its offering quickly depending on trading patterns and which items prove popular. Given the importance of its operating model to long term success it's a relief to hear the working practices discovered in Leicester aren't endemic, or an inevitable part of model. New risk mitigation efforts should reduce the chances of a repeat.

Looking beyond the pandemic and recent headlines, international expansion is the key to future spoils - with US sales up 83% in the first half and rest of world sales up 55%. Deals have helped here, with the acquisition of the remaining stake in PrettyLittleThing boosting US sales and the group also adding a raft of higher end UK high street names.

A £200m fundraise means the shopping spree hasn't hurt the balance sheet too much, with nearly £350m of net cash at the end of the half. Some of that extra cash is going towards infrastructure improvements, and capital expenditure is expected to spike in the current financial year. But there's also plenty of firepower left to pounce on other acquisition opportunities to further international ambitions.

It would be wrong not to sound a note of caution on valuation - which with a PE ratio of 44.5 times earnings is pretty eye-watering (if not far off the long term average). To justify that rating Boohoo needs to continue growing sales at its current breakneck speed and simultaneously improve margins. Boohoo has been able to meet it so far, but it's a big ask.

boohoo key facts

  • Price/Earnings ratio: 44.5
  • Average Price/Earnings ratio since listing: 42.6
  • Prospective yield: 0%

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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Half Year Results

Boohoo's active customers increased by 34% in the last 12 months, reaching 17.4m, while items per basket rose 10%.

The UK remains the group's largest market, with sales rising 37% to £430.2m. Margins in the region benefited from rising basket sizes, lower returns and lower marketing costs as a proportion of sales.

In the US sales rose 83% to £202.2m, as social media campaigns drove "exceptional growth" in PrettyLittleThing and boohooMAN. However, increased promotional activity and increased transport costs increased expenses, offsetting lower returns.

Sales in the Rest of Europe rose 40% at constant exchange rates to £123.7m, with NastyGal and boohooMAN the stand out performers. The division also saw return rates drop during the lockdown - although they have been returning to normal more recently.

Rest of World sales grew 18% at constant exchange rates, hitting £60.4m. Reduced airfreight capacity caused increased distribution costs for the more distant markets.

Group level operating margins improved from 7.9% in the same period last year to 8.3% in 2020, as better gross margins and lower administrative expenses as a proportion of total sales offset higher transport costs.

Capital expenditure increased substantially year-on-year, from £6.4m to £27.1m, reflecting investment in the Sheffield and Burnley distribution warehouses. The group also completed several acquisitions in the period, with Miss Pap, Karen Millen and Coast are all said to be trading well, while Oasis and Warehouse now trading from new websites since July. The group completed the acquisition of the remaining 34% of PrettyLittleThing that it did not already own for £269.8m in May.

Excluding these acquisitions free cash flow in the period came in at £100m, up from £45.7m last year.

Net cash at the end of the year stood at £344.9m, up from £207.3m a year ago, reflecting the issue of nearly £200m of new shares to fund acquisitions.

Medium term revenue and margin guidance remains unchanged, despite the strength of recent trading, with revenue expected to rise by 25% a year and a cash profit margin of 10%.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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