HL comments9 Feb 2021 07:45
I think this is from HL, I was sent this:
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 Pr
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