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boohoo - guidance upped, Agenda for Change accelerates

Sophie Lund-Yates, Equity Analyst | 14 January 2021 | A A A
boohoo - guidance upped, Agenda for Change accelerates

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Boohoo Group Ordinary 1p

Sell: 336.00 | Buy: 336.80 | Change -15.20 (-4.33%)
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Group revenue rose 40% in the four months to 31 December, to £660.8m. That reflects double digit growth in all regions, with the UK and US the best performers.

Sales growth guidance for the full year has been upgraded to 36% - 38%, up from 28% - 32%.

The Rt. Hon. Sir Brian Leveson's initial report to the board is now available on boohoo's plc website. The high court judge was appointed in November, to provide independent oversight of boohoo's Agenda for Change programme, following the supply chain and working conditions scandal.

The shares fell 3.1% following the announcement.

View the latest boohoo share price and how to deal

Our View

We should address the elephant in the room first.

boohoo was rocked by accusations of poor working conditions and low pay at one of its Leicester suppliers last year. Subsequent inquiries have found evidence of pretty woeful compliance processes and corporate governance.

As Sir Brian Leveson's initial review puts it, boohoo is now on the right track - we're inclined to agree. We're particularly encouraged to see the new layers of internal compliance surrounding supplier tendering. And the removal of 64 sub-par suppliers already is swift going.

But fixing the root of the problem isn't going to be straightforward and will take time. What's important is these risk mitigation efforts stop a repeat occurrence. Because while medium term trading looks well-set, the long-term investment case of any company requires sufficient quality of management and corporate governance.

And in boohoo's case, the modus operandi rests on its ability to utilise its UK based, fast-fashion supply network. Its model allows it to react to changes in trends very fast, ultimately helping sales and margins. This is what helps it keep prices so low - its unique selling point and an especially useful tool now. It should help the group trade in the face of an economic downturn and squeezed consumer spending.

A 40% uptick in sales, and a balance sheet flush with cash, is impressive in the current environment. It also gives the group firepower to pounce on any acquisitions to help propel growth. We're as yet unconvinced how new additions Karen Millen, Coast and Oasis will fare with boohoo's younger audience, but we'll have to wait and see.

There are some other things to keep in mind though. Margins are dipping, which isn't the end of the world because increased sales stop this from hurting profits. But if sales were to take a hit, this would be a problem. International expansion - especially the US, is the key to future spoils and this comes with large infrastructure bills, which will also squeeze margins. To that end, and because the share price valuation demands it, it's more important than ever sales continue to grow at a heady pace.

The accelerated shift to online caused by the pandemic, and boohoo's breakneck response speed to new trends, puts it in a great spot to achieve this. But given the importance of its operating model to long term success, we would advise caution until we have more substantive proof that management can keep its house (and many, many suppliers) in order. For those prepared to accept the external risks, boohoo is in a good commercial position and could offer opportunity.

boohoo key facts

  • Price/Earnings ratio: 36.5
  • Average Price/Earnings ratio since listing (2014): 42.2
  • Prospective yield: 0%

All figures are sourced from Refinitiv. 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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Third quarter trading details (figures are given at constant currency)

Sales rose 40% to £357.2m in the UK. The group is close to finishing the extension of its warehousing capacity, and the new site is due to open in April 2021. It will be used by the Nasty Gal, Karen Millen, Coast, Oasis and Warehouse brands.

Acquired brands, Warehouse and Oasis have now been integrated into boohoo's platform.

The USA recorded a 51% increase in sales, reaching £167.7m. Europe (ex UK) was up 32% at £90.4m, while the Rest of World climbed a more modest 24%, with revenue of £45.5m.

The group expects a "small cost headwind" from higher distribution and admin costs because of Brexit.

Gross margins dipped 50 basis points, and now stand at 53%. Boohoo has net cash of £386.9m, compared to £344.9m at the end of August.

Medium-term guidance remains for 25% sales growth per annum and a 10% underlying cash profit (EBITDA) margin.

Boohoo provided an update on its Agenda for Change programme, which includes (but is not limited to):

  • "Significant" investments in internal Responsible Sourcing, Compliance and Sustainability teams
  • Appointing KPMG as consultants to advise and monitor the implementation of the Agenda for Change programme
  • Expanding the number of Independent Non-Executive Directors
  • The removal of 64 suppliers, and ongoing investigations
  • The group intends to publish all UK tier one and two suppliers by the end of March, with the names of all global suppliers expected at the end of September

Sir Leveson said there is still work to do, and implementing broad change won't be straightforward. However, he acknowledged that "boohoo has enthusiastically started the journey and is travelling along the right road".

Find out more about boohoo shares including how to invest

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 Refinitiv. 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 disclosure for more information.