RE: Time article stating Boo are a buy , undervalued for the medium term1 Oct 2021 16:56
Boohoo’s business model may be predicated on slinging out clothes at speed, but earning investors’ forgiveness has been a much slower process. Further disappointments on the back of a scandal about poor treatment of workers in Leicester were always going to burn particularly sharply. Cue a sales and margin downgrade and a double-digit share price drop.
Since last July, Boohoo’s shares have significantly underperformed its fast-fashion rivals Asos and the German group Zalando and a lower forward price/earnings multiple. But marking the shares down so severely is short-sighted.
Selling its own brands means Boohoo typically earns higher margins than Asos, at 8.7 per cent versus its rival’s 5.8 per cent for the first half of the year. But not building its business on merely flogging the wares of third parties also means it has not had to sacrifice profitability to fight to provide the fastest delivery and snazziest app to draw customers in, Peel Hunt’s John Stevenson says.
Costs and acquisitions cut profits at Boohoo by two thirds
If Asos’s growth story is about expanding internationally, Boohoo will be judged by the extent to which it can integrate the brands it has acquired on to its online platform and reinvigorate sales. Its recent purchases Debenhams, Burton, Wallis and Dorothy Perkins were only relaunched this year, but the impressive sales growth delivered by its earlier acquisitions Nasty Gal and Pretty Little Thing, show that Boohoo has the nous to pull off this fusion.
The Arcadia carve-up may have given Asos the flashier Topshop brand, but Boohoo has broadened its target age demographic beyond a core of 18 to 24-year-olds by snapping up Burton, Wallis and Dorothy Perkins, and at a cut price too. Earlier acquisitions of higher price-point retailers Karen Millen and Coast started this trend. Debenhams will not only further diversify its end-markets by offering homeware, but also superior scale in the beauty business.
Spending this year is due to be £25 million higher than initially guided, at £275 million, primarily due to initial investment on its first US distribution centre and the new Debenhams online sales platform. Net cash sunk to £94 million by the end of August, down from £345 million at the same point last year. But there’s no plans to tap the market for extra cash. High cash generation means it can afford to fund the bulk of capital expenditure via day-to-day business. Analyst expectations are that it will maintain the net cash position that it’s recorded since IPO, forecasting net cash of £224 million at the end of February next year.
Adjusted margin expectations for the year have been cut to between 9 and 9.5 per cent, from previous guidance of 9.5 to 10 per cent. Damage here should have been predictable enough, Asos had already warned that higher freight costs had sapped its margin. But with travel to the US opening up, freight costs may well begin to normalise next year.
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