Boohoo Group plc (BOO) Ordinary 1p
HL comment (8 July 2020)
Following allegations of poor working conditions and low pay at one of the Leicester factories used to supply boohoo clothes, boohoo has launched an independent review of its UK supply chain.
boohoo is "shocked and appalled" by the findings, and has terminated contracts with all third parties associated with the factory in question. It highlighted about 40% of its products are made in the UK, because this allows further flexibility and the ability to react quickly to changes in trends, rather than a cost benefit to the business.
The group has pledged an initial amount of £10m to eradicate supply chain malpractice. It will provide an update on the supply chain review at Half Year results in September, ahead of a wider Sustainability report alongside Full Year Results next spring.
Two further Non-Executive Directors are being recruited to improve independent oversight on the board. Particular consideration will be given to candidates with Environmental, Social and Governance (ESG) experience.
The shares fell 2.4% following the announcement.
boohoo was able to trade when its high street counterparts couldn't during lockdowns, putting it in a better position than most. And sales have continued to thrive.
We suspect cheap price tags have a strong part to play - why spend big on new clothes when no-one's around to see it?
Its affordable products should perform better in the face of squeezed discretionary spending too. The retail industry is already fiercely competitive and continued discounting has seen gross margins come under pressure, but crucially operating margins are hovering in double-digit territory.
That's helped by an incredibly supple supply and manufacturing process, which allows it to pivot its offering quickly depending on trading patterns and which items are proving popular.
This model is an important part of the investment case, and is why recent news of poor working standards hit the share price. If the incident is an isolated one then resolution should be swift, and won't cause a long-term problem. However if this is a more widespread issue questions may be raised about boohoo's ability to buy its garments cheaply enough to sell at the bargain prices expected by its core customers.
The other priority is managing reputational fall out. A sustained customer boycott would clearly be bad news. For now it's too soon to say what the extent of the damage to the brand is, or how successful boohoo's efforts will be at stemming any harm caused.
Looking beyond the pandemic and recent headlines, international expansion is the key to future spoils. Acquisitions have helped here, with sales growing at an impressive rate, including buying the remaining minority stake in Pretty Little Thing.
The shopping spree hasn't hurt boohoo's balance sheet either. The group has £350m of net cash on completion of the deal, which offers a layer of protection in these uncertain times. It also means the group has the firepower to pounce on other acquisition opportunities to help its international ambitions.
We're a little less enthusiastic about the purchases of Karen Millen, Coast, Oasis and Warehouse. These names are more associated with mature shoppers and only time will tell if boohoo's influencer-led marketing will resonate.
Housing these additions and international expansion doesn't come cheap either- capital expenditure is expected to spike in the current financial year. That's fine if sales growth follows suit - if it doesn't then the added scale becomes a drag, rather than a benefit, for margins and profits.
Overall we continue to think boohoo has a strong operating model and opportunities for the future, although we remain mindful of the risks posed by recent allegations. A price to earnings ratio of 31.2 is lower than the average, but there is still scope for the shares to fall sharply if the group hits any more bumps in the road.
boohoo key facts
- Current 12m forward price to earnings ratio: 31.2
- Average 12m forward price to earnings ratio since listing (March 2014): 42.9
- Prospective yield: boohoo doesn't currently pay a dividend
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Trading details (figures at constant exchange rates) 17 June 2020
First quarter revenues rose 45% to £367.8m, excluding the impact of exchange rates. That reflects strong growth across all geographies, especially the US.
The group now expects full year revenue growth of around 25%, better than current market expectations.
Alongside the trading statement boohoo announced the acquisition of the online businesses, and all associated intellectual property, of Oasis and Warehouse for £5.25m.
The biggest improvement in first quarter revenue came from the US, which reported an 83% rise to £92m. The UK, which is still the biggest region by sales, posted a 30% increase to £183m. In the Rest of Europe revenue was up 65%, reaching £63.4m, while Rest of World revenue rose 22% to £29.4m.
boohoo said there was strong underlying growth across the boohoo, Pretty Little Thing and Nasty Gal brands. More recently acquired names Karen Millen, Miss Pap and Coast have been integrated onto boohoo's platform and "continue to trade strongly".
Gross margins rose from 55% to 55.6%, helped by the group's flexible supply and manufacturing processes. This allowed it to react quickly when lockdowns hit, and categories like loungewear became more popular.
Oasis and Warehouse's online operations generated revenues of £46.8m in the last financial year, and will be integrated into the business over the coming months. boohoo is actively considering further acquisition opportunities, with a number of prospects "likely" to emerge in the coming months because of the challenging conditions.
The group finished the quarter with over £350m of net cash.
Looking ahead, full year underlying cash (EBITDA) margins are expected to be between 9.5-10%. This will depend on the extent of discounting in the sector as well as the effects of general trading uncertainty. Capital expenditure will be £60m - £80m, compared to £45.6m last year.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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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