Boohoo Group plc (BOO) Ordinary 1p
HL comment (8 February 2021)
boohoo has agreed to acquire the e-commerce, digital assets and inventory of Burton, Dorothy Perkins and Wallis, from the administrators of Arcadia Group. boohoo will pay £25.2m in cash, which will come from existing cash reserves, upon completion of the deal.
boohoo highlighted the brands had over 2m active customers, and offers the group chance to broaden its demographic. In the most recent financial year to 29 August 2020, the brands generated unaudited revenues of around £427.8m, and unaudited cash (EBITDA) losses of £14.3 million.
The deal is due to complete on 9 February 2021, and the acquisitions are expected to "contribute modest revenues over the final few weeks" of boohoo's financial year. Transaction and restructuring costs of £10m - £15m are expected over the next three months.
The shares fell 4.3% the morning of the announcement.
We should address the elephant in the room first.
boohoo was rocked by accusations of poor working conditions and low pay at one of its Leicester suppliers last year. Subsequent inquiries have found evidence of pretty woeful compliance processes and corporate governance.
As Sir Brian Leveson's initial review puts it, boohoo is now on the right track - we're inclined to agree. We're particularly encouraged to see the new layers of internal compliance surrounding supplier tendering. And the removal of 64 sub-par suppliers already is swift going.
What's important is these risk mitigation efforts stop a repeat occurrence. Because while medium term trading looks well-set, the long-term investment case of any company requires sufficient quality of management and corporate governance.
And in boohoo's case, the modus operandi rests on its ability to utilise its UK based, fast-fashion supply network. Its model allows it to react to changes in trends very fast, ultimately helping sales and margins. This is what helps it keep prices so low - its unique selling point and an especially useful tool now. It should help the group trade in the face of an economic downturn and squeezed consumer spending.
A 40% uptick in sales, and a balance sheet flush with cash, is impressive in the current environment. It also gives the group firepower to pounce on any acquisitions to help propel growth.
The recent additions of Debenhams, Dorothy Perkins, Wallis and Burton add up to quite a biggie in terms of scale. By not taking on the physical store estates, these deals should be low risk, especially because they're being funded by existing cash on the balance sheet. Although we'll be interested to see what the excess inventory being acquired from the Arcadia brands will mean for profits - if the group struggles to shift it, this could lead to write-downs in its value. The opportunity here is big, and we wouldn't be surprised to see more deals in the future, as boohoo aims to broaden its demographic. But we're yet to see how effectively boohoo will entice this new customer base. We commend the group's willingness to strike while the appetite for online shopping is so hot, but the proof will be in the pudding.
There are some things to keep in mind. Rising sales volumes are offsetting declining margins at the moment, but these recent expansion efforts will likely depress things further. The crucial expansion in the US comes with large infrastructure bills too, which also puts pressure on margins. To that end, and because the share price valuation demands it, it's more important than ever sales continue to grow at a heady pace.
The accelerated shift to online caused by the pandemic, boohoo's breakneck response speed to new trends, and recent efforts to increase its scale puts it in a great spot to achieve this. But given the importance of its operating model to long term success, we would advise caution until we have more substantive proof that management can keep its house (and many, many suppliers) in order. For those prepared to accept the external risks, boohoo is in a good commercial position and could offer opportunity.
boohoo key facts
- Price/Earnings ratio: 35.3
- Average Price/Earnings ratio since listing (2014): 42.1
- Prospective yield: 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.
Third quarter trading details 14 Jan 2021 (figures are given at constant currency)
Group revenue rose 40% in the four months to 31 December, to £660.8m. That reflects double digit growth in all regions, with the UK and US the best performers.
Sales growth guidance for the full year has been upgraded to 36% - 38%, up from 28% - 32%.
The Rt. Hon. Sir Brian Leveson's initial report to the board is now available on boohoo's plc website. The high court judge was appointed in November, to provide independent oversight of boohoo's Agenda for Change programme, following the supply chain and working conditions scandal.
Sales rose 40% to £357.2m in the UK. The group is close to finishing the extension of its warehousing capacity, and the new site is due to open in April 2021. It will be used by the Nasty Gal, Karen Millen, Coast, Oasis and Warehouse brands.
Acquired brands, Warehouse and Oasis have now been integrated into boohoo's platform.
The USA recorded a 51% increase in sales, reaching £167.7m. Europe (ex UK) was up 32% at £90.4m, while the Rest of World climbed a more modest 24%, with revenue of £45.5m.
The group expects a "small cost headwind" from higher distribution and admin costs because of Brexit.
Gross margins dipped 50 basis points, and now stand at 53%. Boohoo has net cash of £386.9m, compared to £344.9m at the end of August.
Medium-term guidance remains for 25% sales growth per annum and a 10% underlying cash profit (EBITDA) margin.
Boohoo provided an update on its Agenda for Change programme, which includes (but is not limited to):
- "Significant" investments in internal Responsible Sourcing, Compliance and Sustainability teams
- Appointing KPMG as consultants to advise and monitor the implementation of the Agenda for Change programme
- Expanding the number of Independent Non-Executive Directors
- The removal of 64 suppliers, and ongoing investigations
- The group intends to publish all UK tier one and two suppliers by the end of March, with the names of all global suppliers expected at the end of September
Sir Leveson said there is still work to do, and implementing broad change won't be straightforward. However, he acknowledged that "boohoo has enthusiastically started the journey and is travelling along the right road".
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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