HL research write up not looking good tbh17 Dec 2021 13:55
Our View
Boohoo's downgraded full year guidance again, as shipping delays and variant concerns weigh on revenue and profits. The group's also seen returns spike in the UK as more people bought occasion-wear like dresses.
While a lot of the issues are outside of the group's control, there are also boohoo specific problems.
The group's spending heavily on increased capacity, especially abroad where there's more room for growth. If this turns out to be a systemic slowdown in sales, not just a blip, those extra warehouses will become a big problem for profits. The world of fast fashion is a competitive place, by the time the group's US distribution network comes online in 2023, its American shoppers may have moved on.
It looks like demand may not recover as quickly as hoped in Europe either. Sales showed signs of deteriorating in October and November, a trend that could continue as long as variant concerns persist.
But if the demand weakness is transient and covid-related, boohoo's longer- term proposition is a strong one in our view. It has a UK based, fast-fashion supply network. Its model allows it to react to changing trends quickly, ultimately helping sales and margins. This is what keeps prices so low - its unique selling point and an especially useful tool in the face of an economic downturn.
Acquisitions including Debenhams, Dorothy Perkins and Coast also offer growth potential. Multi-label offerings have fared well at other online retailers. The question now is how quickly boohoo can build scale and bring costs down.
A balance sheet with £70m of net cash adds a layer of protection. It allows the group to invest for expansion, and stomach ups and downs. We are watching capital expenditure closely though. If a company struggles to stick to their capex budget, it can signal problems. If prolonged, it could damage the balance sheet.
Zooming out to the big picture, the Agenda for Change is rumbling on. We're impressed by the response to address poor wages and labour conditions. But it's by no means the end of the road. The challenge now will be to successfully embed this step-change in thinking within a new business culture. That's not an easy thing to do.
We're more concerned about boohoo than we have been. The supply chain bottle necks and cost inflation won't last forever, but another year coping with this kind of disruptions would be disastrous for the retail sector, Boohoo included. The group's breakneck response speed to new trends has been muted by its inability to get those styles to customers quickly.
boohoo's valuation has come down significantly as these challenges become more apparent, which could present a longer-term opportunity. However, with so much uncertainty ahead investors should proceed with caution.
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