After accounting for returns by customers, revenue for the online fast fashion retailer fell by 10% to £882m. That's still 56% up on the equivalent pre-pandemic period in the first half of 2019.
Underlying operating profit was down 85% on the first half of 2021 to £9.6m, and 81% down on the six months to August 2019. This was impacted by freight and logistics inflation, weaker than anticipated consumer demand and high cost inflation from the macro-economic environment, as well as an increase in brand investment.
Boohoo expects a similar rate of revenue declines to persist over the remainder of the financial year if these conditions continue. Full year underlying EBITDA (cash profit) margins are likely to be between 3% and 5%, compared to the previously guided range of 4% and 7%.
The shares were down 4.7% in early trading.
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Our View
In boohoo's largest markets first quarter weakness has persisted into the second quarter, resulting in downgraded guidance for the full year. When the corner will turn is a hard call to make. Cost and shipping challenges remain and the decline in consumer sentiment has accelerated of late, in the UK at least.
While a lot of the issues are outside of the group's direct control, there are also boohoo specific problems.
The group's spending heavily on increased capacity, especially abroad where there's more room for growth. If this turns out to be a systemic slowdown in sales growth, not just a blip, those extra warehouses will become a big problem for profits. The world of fast fashion is a competitive place, by the time the group's US distribution network comes online in 2023, its American shoppers may have moved on. Only time will tell how much of the fall in demand can be pinned on the current difficulties with delivery times.
We're also concerned about the broader environment. Fast fashion is likely to come under fire if current levels of inflation persist. While the price point is more palatable for a boohoo dress, the very occasions it's being bought for, like a big night out or holiday, are going to find themselves rubbed off calendars should conditions not improve.
For those prepared to accept a bit more risk, boohoo's longer- term proposition could have merit. It has a UK based, fast-fashion supply network. Its model allows it to react to changing trends quickly, ultimately helping sales and margins. This is what keeps prices so low - it's a unique selling point.
Acquisitions including Debenhams, Dorothy Perkins and Coast also offer growth potential in new demographics too. Multi-label offerings have fared well at other online retailers. The question now is how quickly boohoo can build scale and bring costs down.
Significant infrastructure spend means the balance sheet's strength has been eroded in recent years and now carries a small net debt position . The group's still got breathing room with its lenders, so we're not worried about an immediate cash crunch. But capital expenditure will be worth keeping an eye on moving forward. If a company struggles to stick to their capex budget, it can signal problems. If prolonged, it could damage the balance sheet.
We're more concerned about boohoo than we have been. The supply chain bottle necks and cost inflation shouldn't last forever, but a prolonged period with this kind of disruption would be tough for the retail sector, boohoo included. The group's breakneck response speed to new trends has been muted by its inability to get those styles to customers quickly.
boohoo's valuation has come down significantly as these challenges become more apparent, and with so much uncertainty ahead investors should expect a bumpy ride.
boohoo key facts
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.
Half Year Results
In boohoo's largest market, the UK, customers are buying more but also sending a higher proportion of goods back. Pre-returns revenue was up 12% but net revenue was down 4% to £545m. There are some glimmers of growth returning though from the Debenhams online store and other recently acquired brands including Dorothy Perkins, Wallis and Burton. Gross margin decreased from 51.7% to 50.2% as a result of elevated freight cost pressures.
Sales in the USA were below expectations, with revenue declining 29% to £177m, albeit revenue growth over the three-year period is strong at 60%. Delivery times to the USA are still elevated compared to pre-pandemic levels, which isn't helping but boohoo says things are improving. Gross margin is high, although lower than the prior half year, reducing from 61.5% to 60.2%.
Revenue in Rest of Europe (ex UK) declined 2% to £102m, but the region saw a return to growth in the second quarter at +5%. Growth on the pre-pandemic period three years ago is 17%, and comfortably ahead of the broader market which continues to be broadly flat versus pre-pandemic levels. Gross margin declined from 53.6% to 52.7%.
Rest of world sales grew 14%, the only region with positive sales growth at the half year mark, driven by the success of wholesale sales to boohoo's partners in the Middle East. But this was the segment that saw the biggest gross margin hit with a fall from 55.7% to 50.8% reflecting high freight and distribution costs.
Improved cash conversion from operations saw operating cash flows nearly double to £41m, and combined with a fall in capital expenditure from £172.2 to £38.7m, this drove a big improvement in free cash outflows from £157.3m to £2.7m.
Boohoo reported a net debt position of £10.4m versus net cash of £98.4m at the half-way point last year and £207.3m net cash at 31 August 2019.
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 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.
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