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boohoo - full year sales rise, but outlook is less exciting

Sophie Lund-Yates, Equity Analyst | 5 May 2021 | A A A
boohoo - full year sales rise, but outlook is less exciting

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Boohoo Group Ordinary 1p

Sell: 320.10 | Buy: 320.50 | Change -8.30 (-2.53%)
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boohoo's full year revenue came in at £1.7bn, up 41%, reflecting double digit growth in every region. Underlying cash profit (EBITDA) rose 37% to £173.6m.

Revenue growth is expected to be 25% in the new financial year, boosted by newly acquired brands. Cash profit margins are expected to be slightly lower because of ongoing investment, and return rates are expected to start increasing back to normal levels.

The shares fell 1.1% in early trading.

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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.

We have to admit we've been impressed by progress to address these issues. The group's moved swiftly and added a number of new positions, teams and processes to dig out the rot. More important is that 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 in the face of an economic downturn.

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.

The recent additions of Debenhams, Dorothy Perkins, Wallis and Burton add up to quite a biggie in terms of scale. By not taking on the physical store estates, these deals should be low risk, especially because they're being funded by existing cash on the balance sheet. Although we'll be interested to see what the excess inventory being acquired from the Arcadia brands will mean for profits - if the group struggles to shift it, this could lead to write-downs in its value. We wouldn't be surprised to see more deals in the future.

There are some things to keep in mind. Tailwinds from the pandemic, including the closure of physical shops, and lower returns rates, are going to start unwinding. That means growth is expected to temper this year. Margins have held up well, but they will need to be watched carefully. As expansion plans ramp up, especially in the crucial US region, those extra bills could start to nibble away at profits more than expected if things don't run to plan.

boohoo's breakneck response speed to new trends, and recent efforts to increase its scale puts it in a great spot to achieve growth over the long-term. But given the importance of its operating model to long term success, we would advise caution until we have further 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.

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boohoo key facts

  • Price/Earnings ratio: 29.2
  • Average Price/Earnings ratio since listing (2014): 41.7
  • Prospective yield: 0.0%

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.

Full Year Results (constant currency)

The number of active customers rose 28% to 17.8m, and there was an 8% rise in the number of items per basket- boohoo said the improvement is because of the pandemic.

The UK (boohoo's biggest region) saw revenue rise 39%, to £945.1m, with all brands putting in a strong performance. Gross margins improved to 50.9% from 50.3%, partly because of the increased basket sizes. The US benefited from good performances from PrettyLittleThing, Karen Millen and boohooMAN. Revenue rose 63% to £435.1m, and return rates were much lower than normal. Gross margins improved very slightly to 59.9%.

Sales in the Rest of Europe were a mixed picture because of lockdowns, but overall revenue grew 30% to £244.7m. The group is looking to offset the "moderate" cost increases caused by Brexit through cost savings. Return rates have started to normalise.

Rest of World sales were more moderate, rising 19% to £120.4m. Trading was held back by reduced airfreight capacity.

Group underlying operating margins dipped slightly, from 8.7% to 8.6%, reflecting higher overseas distribution costs because of the pandemic.

boohoo spent £49.3m on capital expenditure in the year, including almost £17m invested in distribution centres. £73.4m was spent on acquiring new brands, including Oasis, Warehouse and Debenhams.

Including the acquisitions of new brands and intellectual property, and the remaining stake of PrettyLittleThing, there was a free cash outflow of £121.8m, compared to a £70.1m inflow last year. Net cash stood at £276m at the end of February, up £35.4m, and boosted by the £195.7m capital raise.

So far in the new financial year, the group's bought a new London head office for £72m, and capital expenditure for the remainder of the year is predicted to be £125-175m. This will be spent on new warehouse sites in Wellingborough and Daventry, and enhancing existing facilities.

The supply chain review is ongoing, and the group expects to publish its full list of global suppliers by September 2021.

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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 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 for more information.