Boohoo is preparing to raise around £35mn of cash by issuing new equity shares, equivalent to around 11% of its market value before the announcement. This comes as the group looks to bring its debt down to target levels by year-end.
Full-year guidance remains intact, with underlying cash profits (EBITDA) of £50mn expected. Underlying cash profits are then expected to grow at double-digit rates in 2027.
The shares fell 12.4% on the day of the announcement.
Our view
Boohoo’s shares sold off as the company moved to raise £35mn from investors, with the market rattled by the dual implications that it was edging closer to breaching lender covenants and that existing shareholders face dilution. While the equity raise is clearly painful for current investors, it does provide CEO Dan Finley with additional breathing room to stabilise the balance sheet and push ahead with his strategic plans.
Recent trading at the fashion company has been better than expected, helped by a step-change improvement in its Youth Brands. That led the group to nudge its full-year underlying profit guidance higher to £50mn, up 20% on the prior year.
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.
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
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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.
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.