Boohoo Group plc (DEBS) Ordinary 1p

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Underlying sales trends have been improving for the past three quarters and were 5% below last year’s level as of February.

Fixed costs have fallen from £175mn to £119mn, driven by warehouse consolidation and a right-sizing of its inventory levels. Helped by a £40mn equity raise back in February, the group’s net debt levels have fallen to under 2 times underlying cash profit (EBITDA).

Full-year underlying cash profits are now expected to rise by 36% to £53mn, up from its previously upgraded guidance of £50mn.

In the coming year, underlying cash profits are expected to continue growing at double-digit rates and free cash flow is also forecast to “materially improve”.

The shares rose 3.2% in early trading.

Our view

The fast-fashion company, which now refers to itself as Debenhams, delivered a positive trading update as its business turnaround gains traction. Helped by continued cost savings, full-year underlying cash profits are now set to exceed its previously upgraded guidance, and the shares reacted positively on the day.

Momentum in its largest division, Debenhams, continues to impress, thanks to its marketplace model. This involves allowing third-party brands to sell their goods on Debenham’s online platform, with the group taking a cut of any third-party sales made, and banking just that cut as revenue.

The marketplace model brings a host of benefits, allowing sales to scale quickly as more sellers are brought into the fold. The third-party sellers also own the inventory and are responsible for picking, packing and shipping orders, removing a host of costs and inventory risk from boohoo’s operations. That’s had a significant positive impact on the group’s profitability so far, and more cost benefits are expected in the near term.

The marketplace model has become the blueprint for an attempted turnaround in its other struggling divisions. For context, despite only contributing around 17% of group revenue in 2025, Debenhams brought in more than half of the total cash profit (EBITDA).

Keep in mind that while underlying sales trends are improving, growth remains in negative territory. Future success relies on getting the top line moving in the right direction again. Breathing life back into its Youth Brands division (which includes PrettyLittleThing, boohoo, boohooMAN) needs to be the main focus in our eyes. With their strong social media following, these brands have the potential to be great assets.

Tensions with its largest shareholder (Frasers) remain high, causing boohoo to push through a management compensation package without shareholder approval. It’s also the reason why the group’s name change to Debenhams hasn’t been made official across the board. Alongside a murky track record of labour exploitation, investors should be aware of elevated corporate governance risks.

Good headway has been made on bringing debt and interest costs under control, helped in no small part by a £40mn equity raise back in February. It also means interest costs are declining, providing CEO Dan Finley with additional breathing room to push ahead with his strategic plans.

Despite the pivot in strategy, our concerns about Boohoo haven’t disappeared. We’ll need to see key customer metrics, sales and profits all trending in the right direction before we get too excited. The lowly valuation may look attractive at face value, but it reflects the major challenges ahead, as well as a competitive retail market.

Environmental, social and governance (ESG) risk

The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.

According to Sustainalytics, Boohoo’s management of ESG risk is average.

The company's disclosure is poor, signalling a lack of accountability to investors and the public. Governance has been a longstanding issue, with the most recent development on executive pay (discussed above) highlighting some of the risks. It has some initiatives to manage risks related to material ESG issues, however, the company lacks policies and programmes in key areas. Furthermore, the company has been involved in numerous significant ESG-related controversies.

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 LSEG. 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.

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