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Boohoo: The growth story is not over

Publication Date: 02 May 2018 - By Anoush Fazalbhoy By Anoush Fazalbhoy
Actionable
Differentiated

Investment Strategies Equity UK Consumer

While Boohoo’s share price has risen by over 15% this month, it is still about a third down from its 52-week high. The company’s lofty valuation of about 68x earnings perhaps prompted investors worried about decreased margins and tough trading conditions in the UK to flee.

However, Boohoo’s latest trading update has been largely positive. For the year ended 28 February, the online retailer reported a 40% rise in pre-tax profits of £43.3m and an almost two-fold increase in revenue to £580m from £295m in the previous year. Gross margins dropped 180bps to 52.8% from 54.6% previously but the slight pressure on margins was to be expected given the current climate of heavy discounting.

Boohoo’s customer base expanded to 9.8m active customers from 6.5m set the previous year. The company’s acquisition of Pretty Little Things in 2017 has helped drive this growth as the brand reported customer growth of 128 percent and revenues of £181.3m.

Nasty Gal, the company’s other acquisition, contributed revenues of £24.4m. While Nasty Gal has only 0.4m active customers, its average order value was £52.82 versus £36.05 for Pretty Little Things. As Nasty Gal’s appeal outside the US increases, this higher average value could become a significant driver of higher margins and revenues.  

Though investors have punished competitor Asos for higher capital spending, Boohoo is also embarking on a capital expenditure spree of its own.

The company is currently constructing a £150m new warehouse to increase capacity and build a distribution network capable of generating £3bn global sales annually. Boohoo raised £50m of equity to fund the project.

For the year ahead, Boohoo has forecast sales growth of 35% to 40% with an adjusted profit margin of 9% to 10% and capital expenditures of £50m to £60m. While the UK made up 61% of total sales and posted revenue growth of 95 percent, international expansion will be key to the company’s future success.

Currently, the global market excluding the US, Europe and the UK makes up only 11% of the company’s revenues.

Given that China is the world’s largest e-commerce market with total web sales exceeding 1 trillion dollars, Boohoo has barely scratched the surface of its potential sales.

Marketing and distribution costs are likely to increase as the company moves overseas and thus margins could be compressed further. Some investors may be sensitive to Boohoo’s decreasing margins given its high valuations and therefore the stock price may fall further. Furthermore, tough trading conditions may also further press margins.

Boohoo's appealing brands and experienced management however provide a strong growth story. I estimate the company’s earnings to grow between 25% to 30% in the upcoming year without adding too much pressure to cash flows. If Boohoo management can replicate their success of Pretty Little Things with the Nasty Girl brand, earnings may even grow faster. Growing market share abroad however will be key to the company's success. 

Disclosure:

I have positions in the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Anoush Fazalbhoy

 

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