Boohoo announced that it’s trading ahead of its prior expectations, helped by continued momentum at Debenhams and an improved performance at its Youth Brands. All brands are trading profitably.
PrettyLittleThing had previously been earmarked for disposal. But recent turnaround efforts have driven a “material improvement in profitability”, and Boohoo has decided to retain the brand.
With just a month left in its financial year, full-year underlying cash profit (EBITDA) guidance has been upgraded by £5mn to £50mn.
The shares rose 6.6% in early trading.
Our view
Boohoo's recent trading has been better than expected, helped by a step-change improvement in its Youth Brands. That’s led the group to nudge its full-year underlying profit guidance higher, which buoyed markets on the day.
Momentum in its Debenhams division continues to impress, thanks to its marketplace model. This involves allowing third-party brands to sell their goods on Debenham’s online platform, with boohoo taking a cut of any third-party sales made, and banking just that cut as revenue.
The marketplace model brings a host of benefits, allowing sales to scale quickly as more sellers are brought into the fold. The third-party sellers also own the inventory and are responsible for picking, packing and shipping orders, removing a host of costs and inventory risk from boohoo’s operations. That’s had a significant positive impact on the group’s profitability so far, and more cost benefits are expected in the near term.
The marketplace model has become the blueprint for an attempted turnaround in its other struggling divisions. For context, despite only contributing around 17% of group revenue last year, Debenhams brought in more than half of the total cash profit (EBITDA).
While progress on trimming the cost base has been impressive, future growth relies on getting the top line moving in the right direction again. Customer numbers were continuing to fall at the last count, so breathing life back into its Youth Brands division (which includes PrettyLittleThing, boohoo, boohooMAN) needs to be the main focus in our eyes. With their strong social media following, these brands have the potential to be great assets.
To be clear, the group has not yet signalled a return to cash generation. However, a nearly £40mn equity raise in 2024 means the balance sheet’s in reasonable health for now. It’s also provided some breathing room while the CEO Dan Finley, executes his strategy change.
Tensions with its largest shareholder (Frasers) remain high, causing boohoo to push through a management compensation package without shareholder approval. Alongside a murky track record of labour exploitation, investors should be aware of elevated corporate governance risks.
Despite the pivot in strategy, our concerns about Boohoo haven’t disappeared. We’ll need to see key customer metrics, sales and profits trending in the right direction before we get too excited. The lowly valuation may look attractive at face value, but it reflects the major challenges ahead, as well as a competitive retail market.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Boohoo’s management of ESG risk is average.
The company's disclosure is poor, signalling a lack of accountability to investors and the public. Governance has been a longstanding issue, with the most recent development on executive pay (discussed above) highlighting some of the risks. It has some initiatives to manage risks related to material ESG issues, however, the company lacks policies and programmes in key areas. Furthermore, the company has been involved in numerous significant ESG-related controversies.
Boohoo key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.
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