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boohoo - sales and profits in line with guidance

Fourth quarter net sales rose 7%, with full-year growth coming in at 14%.

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Fourth quarter net sales rose 7%, with full-year growth coming in at 14%. Compared to pre-pandemic levels, there was a 61% increase. Trading has been in-line with guidance.

Higher returns rates were a headwind in the final quarter due to customers favouring clothing items that are more likely to be returned, something that's expected to continue in the first half of the new financial year.

Performance in the UK was strong, with International trading impacted by longer delivery times due to supply chain pressures. Rest of World returned to growth in the fourth quarter, reflecting a positive performance from wholesale.

Full-year cash profit (EBITDA) is expected around £125m, in line with guidance.

John Lyttle, CEO, said: ''The Group has delivered strong growth over the last two years, which has translated into significant market share gains.'' And expects ongoing pandemic related challenges to be ''short-term in their nature''.

On 8 March, the group announced it had completed its 'Agenda for Change' programme, launched in response to criticism surrounding its supply chain and working conditions.

The shares were up 11.0% following the announcement.

View the latest boohoo share price and how to deal

Our View

The market's very positive reaction to the recent trading update shows the level of uncertainty surrounding boohoo. Back in December guidance was significantly lowered, with the group pointing to everything from higher freight costs to Omicron concerns. Downgrades are rarely a good thing, so it's been a relief to see performance has now stabilised.

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.

But if the demand weakness is transient and covid-related, boohoo's longer- term proposition is a strong one in our view. 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 - its unique selling point and an especially useful tool in the face of an economic downturn.

Acquisitions including Debenhams, Dorothy Perkins and Coast also offer growth potential in new demographics. Multi-label offerings have fared well at other online retailers. The question now is how quickly boohoo can build scale and bring costs down.

A balance sheet with £70m of net cash adds a layer of protection. It allows the group to invest for expansion, and stomach ups and downs. We are watching capital expenditure closely though. If a company struggles to stick to their capex budget, it can signal problems. If prolonged, it could damage the balance sheet.

Zooming out to the big picture, the Agenda for Change has come to an end. We've been impressed by the response to address poor wages and labour conditions so far, but that doesn't mean the ordeal is done and dusted. The challenge now will be to successfully embed this step-change in thinking within a new business culture. That's not an easy thing to do.

We're more concerned about boohoo than we have been, albeit we're pleased with recent results. The supply chain bottle necks and cost inflation shouldn't last forever, but another year coping with this kind of disruption would be disastrous 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, which could present a longer-term opportunity. However, with so much uncertainty ahead investors should proceed with caution.

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.

Trading Update (16 December 2021)

In the three months to 30 November, sales including the impact of discounts and returns rose 10% from the same period last year to £506.2m. Strong sales growth in the UK outweighed declines across other regions.

Rising shipping costs throughout the period meant gross margins fell 1 percentage point.

The group lowered guidance for full-year sales growth to between 12% and 14% from 20% to 25%. Freight cost inflation is expected to shave £20m off cash profits at the full year, with margins between 6% and 7%, at least two percentage points lower than initially forecast.

The UK was the group's strongest segment with sales up 32% from last year to £320.3m. Return rates were 12.5 percentage points beyond last year as customers bought and returned an exceptionally high number of dresses.

Sales in the USA fell 14% to £104.6m, as reduced air freight capacity caused significantly longer customer delivery times.

In the Rest of Europe and Rest of World regions sales declined 12% and 21% respectively. The group saw revenue in Europe start to recover in September, but declined throughout the remainder of the period due to customer uncertainty.

The group currently has net cash of £70m and access to over £170m in cash and credit.

The first US distribution centre is expected to come online in 2023, but management is considering options to pull this forward.

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.

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.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 10th March 2022