PAUL SCOTT comments.....in 2 parts27 May 2020 15:34
PART ONE
Boohoo (LON:BOO)
I've started reading the shorting report, written by Matt Earl. My initial impression from the executive summary is that it flags up some interesting points from the annual report, but these are things that are already widely known - i.e. that BOO founder's son still holds a minority stake in PLT. There could be a temptation to boost PLT's profits in order to earn a bumper payday if/when his minority stake is bought out.
I feel that PLT has been a stunning success, and it was bought out originally at an extremely low price (was it ÂŁ5m, from memory?) which short-changed the founder of it. Everyone has done fantastically well out of BOO shares, so I don't really see the problem if this is recognised with a big payout for the people who built this remarkable business. As long as the figures used to value PLT are realistic, and not inflated with overheads being absorbed in other parts of the business. That is a risk.
I knew the people behind BOO in the 1990s, as they were Pilot's (where I was CFO) biggest supplier. They were very shrewd, and ran a successful fashion wholesale business, importing cheap but cheerful clothing. At some point they figured out that they didn't need the retailers any more, and started selling direct to the end customers through a website. They've not looked back, creating a multi-billion valued business.
BOO's profit margins are real. I don't think Matt Earl knows much about the fashion sector, because he questions BOO's high margins versus e.g. Asos. That's not a fair comparison, because Asos is apparently a bit of a shambles internally, and it sells a lot of third-party product. Whereas BOO sources its product directly, thereby gaining the retailer's margin (60%+ before markdown), plus the wholesaler's margin of 20-30%. Put that together, and operating on a test & repeat model (which limits markdown to a far lower level than conventional retailers) and you have a very good business, making high margins. There's nothing suspect about it at all, Matt just doesn't understand the business!
I don't have any position in BOO, but I know the business well, and admire it very much, it's a fantastic business.
His comments on cashflow are fair enough. It's normal to consolidate 100% of a part-owned subsidiary, if the parent company owns over 50%. Then there's an adjustment for the minority interest, on both the balance sheet and P&L. I'm not sure whether you have to include an adjustment on the cashflow statement. He's probably right to flag this as something investors need to adjust for.
Based on my initial scan of the document, I think it flags up some useful points, and potential risk, but there's no smoking gun. Hence why the share price hasn't fallen much. Remember all those shorters have to buy back at some point, so they could get their fingers burned on this one.
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