Member Info for Okehurst1

CFO’s comments on working cap

Worth mentioning this was May so 3 months into H1 2023

‘A key driver of unlocking cash is the work we're doing on our stock management as we push to drive a leaner, lighter, faster boohoo. As mentioned, inventory is down 36% year-on-year. Our lead times are improving 3 weeks faster alone in April compared to a year ago. We've accelerated our stock turn, delivering an additional turn improvement to date.

And whilst we're pleased with the progress made in recent months, there's more opportunity ahead as we look to unlock further lead time improvements. Speed matters and shorter lead times are critical in our drive to get back to growth. The execution of our strategy and specifically, the focus on inventory turn has driven significant working capital inflows over the last year’

He continues the chat then says

‘My focus is on 4 key areas. Firstly, on stock management, we made great progress, bringing inventory down significantly with a 36% reduction year-on-year and more than GBP 100 million in absolute terms, and we see further opportunity to move this further. We're prudently managing all of our costs in our business, ensuring that the cost base is appropriately sized’

Suggest they knew 50% through H1 they had a chance to reduce working cap days, they surprised the market with full year results pulling in £100M of cash

My take is, we will see a drop in revenue up to the 15% but that’s helpful as they push the headline margin up and at the same time generate FCF +

Looks to me they are repositioning some of the brands to higher margin test / repeat were they can which we can see partly via Karen Millen and Campbell/ PLT etc

Mindful of clogging up the BB

Picked up a few topics the BB had been chatting about

None of really know one way or the other how it’s gone but below is a small sample of the Q&A post results

Question

Adam Cochrane (Analysts)

It's Adam Cochrane from Deutsche Bank. A couple of questions, please. You mentioned you have a clear line of sight to a 6% to 8% EBITDA margin. Can you share what sales base is required within your clear line of sight and what the gross margin that is really embedded within that 6% to 8% is, please?

Answer

Shaun McCabe (Executives)

Yes. So I'm not going to give you a breakdown of what sort of margin improvements we might make or where exactly we're going to get those EBITDA improvements from. But the sort of things that we're going to see, John spoke to the capturing of deflation in our product cost prices, whether that's raw materials, as we've seen cotton prices dropping, whether it's freight, whether it's energy costs, all of those things, we need to go and get that.

So that is a big chunk but there's other stuff as well. So in the supply chain, we've gone from -- we went from 2 fulfillment centers to 4. And now we've reduced back down to 3 as we've closed our Wellingborough facility. So we've made ourselves more efficient in the supply chain, for example. As we've managed through a period of decline, we've seen some inefficiency in our marketing.

Question

Simon Irwin (Analysts)

Could I just rephrase that then. I'm saying of all the benefits that are coming through, how much do you think that you'll take to the bottom line? And how much do you think you'll invest in price and proposition.

Answer

Shaun McCabe (Executives)

So we're not going to give you a split of that because actually, we don't know the answer to that. But it will be about investing in price, so improving the price for the customer, and it will be about taking some to margin, but it will also be about investing in lead time. And your question was about why is it competitive advantage. And let me just give you an example of why I think it does give us a competitive advantage.

So when we capture that deflation and what we'll do, what we saw a year ago, Simon, is airfreight was so egregiously expensive that we shifted a whole bunch of our inbound to see. And of course, that adds the lead time. And John spoke about how the test-and-repeat model is very difficult in an environment where you can test, but you can't repeat. You just don't have the lead time to be able to get the product back fast enough -- but in a world where we can invest those deflation, those savings back into airfreight that allows us to get the test-and-repeat model really working for us again. And that's why I think it's a competitive advantage because the test-and-repeat model is the kind of life blood of our buying model.

Question

Simon Irwin (Analysts)

More broadly, why is deflation a competitive advantage? That seems to be the core of your optimism around future margins is that costs are coming down, and therefore, your margins are going to go up because you're going to invest. Why isn't everyone else going to do the same thing?

Answer

John Lyttle (Executives)

I can't answer for everybody else, but I can't answer for us. I think if you look at shipping rates, it's a clear example, we're -- I'm going to say, $1,500 for a 40-foot from China, most ports in Asia into the U.K.. That would hit $15,000 at its peak. If I look at airfreight even in last year versus this year, airfreight today is what sea freight was a year ago and has come down dramatically.

If I look at raw materials, cotton polyester, again, come over the top of the mountain, they've come down substantially versus last year. They're still higher than 2 years ago, but they've come down a lot there. If we look at energy, again, well documented in terms of where energy prices are. So there are just some examples of where deflation is happening. Our job at the top of this table, we paid on the way up is absolutely to make sure we grab it on the way down, and we're being quite aggressive on that.

It’s a long transcript, will copy/paste a few paragraphs that may help this BB

Question

Adam Cochrane (Analysts)

It's Adam Cochrane from Deutsche Bank. A couple of questions, please. You mentioned you have a clear line of sight to a 6% to 8% EBITDA margin. Can you share what sales base is required within your clear line of sight and what the gross margin that is really embedded within that 6% to 8% is, please?

Answer

Shaun McCabe (Executives)

Yes. So I'm not going to give you a breakdown of what sort of margin improvements we might make or where exactly we're going to get those EBITDA improvements from. But the sort of things that we're going to see, John spoke to the capturing of deflation in our product cost prices, whether that's raw materials, as we've seen cotton prices dropping, whether it's freight, whether it's energy costs, all of those things, we need to go and get that.

So that is a big chunk but there's other stuff as well. So in the supply chain, we've gone from -- we went from 2 fulfillment centers to 4. And now we've reduced back down to 3 as we've closed our Wellingborough facility. So we've made ourselves more efficient in the supply chain, for example’

But the key driver is the capturing of the deflation because that was a -- if you look at the -- if you think about the bridge that took us from FY '21, shaving the 10% EBITDA margin to 3.6% EBITDA margin for FY '23. If you look at that bridge, the biggest component of that bridge was a gross margin headwind as we saw those cost prices go up

If I’ve got time tomorrow will copy /paste some of the interesting related comments, may help the BB

Nb posted the link last week - £29 top of my head for voice to script

Hi Hex

It’s well worth a read of the conf call with the analyst they break down the segments and stress the increase in distribution costs / percentages etc

I found it very helpful

Nb they only quote £10M rev on returns for H2

No idea H1

Hi Hex

They said running at 23% including returns are you including returns ? I’ve gone off their conf call

Ditto the container prices etc what they discussed

90% reduction etc was Johns words

Worth noting Boo only started charging for returns in H2

The £10M H2 is factual / audited, it’s fact

However I would focus on the 7% cost of sale increase for distribution which includes returns / containers etc

They point out on the conf call there is a 90% reduction in container costs this to last for example

I’ve listed on a separate post but I think we will see the 15% reduction in revenue worse case but our margin will be closer to 6% than 4%

They were pretty clear they are targeting profit margins

If we do drop 15% H1 we may well drop our stock levels which help our FCF/ working cap days

By choice I would prefer this route, FCF neutral / capex delivered etc

Boo explained the numbers on the conf call

It was £10M revenue H2 being 5M items @ £1.99

If it was 50M items it would have been £100M, they are guiding to no more than £20M top end but expect much lower

Folk - apologies about this, I should have listed as below

The opportunity is even better for Boo, it’s not 4% it’s 7%

This was from one of my posts last week.

Distribution

If we look at the average from 2019 to 2022 this was 16.3% but 15.4% Pre Covid, we know Covid affected its margin in this category

Last year it was whopping 23% and Boo indicate this will come down to normal ex Covid

It’s a crazy number but even working on averages it’s 7%, worth, almost £100M of pure cash / margin

All other data is same

Boo have given us all the information

We know the volume of returns, they told us on the Conf call

They generated £10M H2 so 5M returns @£1.99

Average orders were 3 items making up £56 in total

Total orders p/a 92M give or take

In terms of cost of sales we were 4% higher last year at 24% - average 20% Pre Covid , they expect this to head to 20%

This includes containers down 90% etc

Test / repeat and lead times means they can adjust production sizes quicker, in April alone they slashed 3 weeks off supply times and they see this dropping further in May etc

As I say all the info on the conf call and you can work back to by cross referencing the audited accounts

Mike Ashley just couldn’t make the business work, there may be no value other than stock in Misguided which is what Ashley paid - whatever that value is today?

Whilst he’s been negotiating to bin Misguided he’s bought

£40M of shares in Boo Hoo

We know Boo automated fulfilment centres between USA@ U.K. can handle almost 1.7M items a day, Ashley just doesn’t have that infrastructure

Just on Misguided itself , it’s just a basic brand with maybe £100m to £150M of revenue if that ,Shein will service orders direct from China

Wolf/ T4G

He couldn’t make it work, on line Apparel.

Hi Wolf

For a bit of fun am going to guess the following for H1- could be well out

£750M Rev

5.75% to 6% - COGS ,a nibble at the 13% cost of sales

gets us there and knock £20M off marketing

They are forecasting 4% to 4.5%

FCF, will they play with Capex and come in with £40M? Exceptional’s £12M ? Interest / legals £10M

At this point they would be negative £17M FCF - best case as capex could be £50M

The reduced revenue generates free cash in terms of stock levels, they pulled back £100M last year and said more to come, I reckon it’s highly possible they close the gap on that £17M, so FCF neutral / slightly positive

On the 5.75% to 6%

Just 2.5% off the 13% makes all the difference to to the margin

£20M off the marketing budget is pure bottom line

Plus COGS

Not to be taken seriously but that’s my final tweak ,as I say for bit of fun

…. But I clicked on Pedro’s name as the poster has had so many posts last 24hrs I thought just maybe they have something worthwhile to say but it doesn’t change - note to myself don’t waste time, lesson learnt

PP’s imaginary friend Pedro saying ;

‘Funny that pp1 and myself have been accused of being the same person......This proves we are not......I do like PP1 as he says his thoughts unashamedly.....so you know his thoughts instinctively.....A poster who comes up with the facts......without worrying about the abuse he recieves.....I respect him...’

PP smiling into the mirror whilst typing above ….

Comedy

Hi Wolf

What’s your call on H1 ?

Revenue ?

EBITDA

FCF for the period ?

Any thoughts on these 3 lines ?