Boohoo Group plc (BOO) Ordinary 1p
HL comment (16 June 2022)
In the three months to the end of May, boohoo revenue fell 8% to £445.7m compared to last year. This was in-line with expectations, reflecting the strong comparisons with last year when lockdowns boosted trading. Every region declined but Rest of World, with the USA the worst performer. Net sales were positive but declined overall as return rates continue to normalise.
On a three-year basis, total revenue was up 75%.
boohoo said it's made progress on its strategic targets, including "tightly controlled" inventory, which fell compared to the end of the year. The group still expects full year revenue growth in the low-single digits. Continued higher costs and competitive pressure means underlying cash profit margins are still due to be 4-7%.
The shares fell 12.8% following the announcement.
boohoo's first quarter has been lacklustre, and the outlook is murky at best. Cost and shipping challenges remain and there's another tough year on the horizon with revenue and profit growth expected to be hard to come by.
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.
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 isn't quite as strong as it has been in the past, but there's still a small amount of net cash on the books. We're 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. The supply chain bottle necks and cost inflation shouldn't last forever, but another year coping 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
- Forward price/earnings ratio: 19.7
- Ten year average forward price/earnings ratio: 38.7
- Prospective dividend yield (next 12 months): 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 (4 May 2022)
Full year revenue rose 14% to £2.0bn, up 61% from 2020. Strong growth in the UK helped offset a small decline in international sales.
Higher shipping costs and increased marketing spend meant underlying cash profit (EBITDA) was down 28% to £125.1m, in line with guidance.
The number of active customers rose 10% to 19.9m, 43% higher than 2020. The average order value increased 8% to £48.16 and the number of items per basket decreased from 3.34 to 3.04.
The UK was the groups strongest region, with revenue of £1.2bn. That was up 27% year-on-year and 77% ahead of 2 years ago. Return rates increased to pre-pandemic levels as customers favoured occasion wear and higher priced products which are more likely to be returned. Gross margins fell from 50.9% to 49.4% as price rises couldn't fully offset increased costs.
Rest of Europe saw revenue fall 10% to £219.2m as performance was held back by continued lockdowns and longer delivery times. Return rates were marginally up on the previous year and gross margin was down 1.7 percentage points to 54.5%.
In the USA, revenue rose 4% to £451.6m which was 71% ahead of 2 years ago. Reduced airfreight capacity led to higher delivery times, which hurt demand. Menswear was the standout performer and newer brands also did well. Gross margin was broadly flat at 59.8%.
Rest of world saw revenue drop 10% to £109.2m. As with the USA, reduced airfreight capacity caused delays which hurt performance. Gross margin fell from 54.9% to 52.5%.
There was a free cash outflow of £251.2m, largely due to higher capital expenditure, compared to an outflow of £121.8m the previous year. Net cash decreased from £276.0m to £1.3m.
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 disclosure for more information.
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