Shares in lately-unloved Boohoo (BOO:AIM) rallied 17% to 92p after the online fast fashion retailer reported full-year sales growth at the top-end of guidance and margins in line with expectations.
This provided some relief for the retailer behind the PrettyLittleThing, Nasty Gal, Karen Millen and Debenhams brands after a horrific past 12 months which saw the share price crater on downgrades centred around slowing growth, cost inflation and supply chain issues.
Management has also been trying to convince the market that corporate governance standards are improving at Boohoo too.
SLOWEST-EVER GROWTH
In a brief trading update for the year to February 2022, Boohoo said group sales grew 14% year-on-year, slightly ahead of the 13% analysts were looking for.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation) is expected to be £125 million, in line with December’s guidance and analysts’ estimates.
In the fourth quarter, sales growth slowed to just 7% from 10% in the third quarter and 9% in the second quarter, marking Boohoo’s slowest growth quarter since it listed in 2014.
The firm said higher than usual return rates due to a shift in the product mix towards more occasion-wear clothing such as dresses was to blame for crimping revenue progress.
While Boohoo continues to trade strongly in the UK and witnessed a return to growth in the Rest of the World in the fourth quarter, performance in the US and Europe continued to be impacted by longer customer delivery times as a result of pandemic-related supply chain pressures.
GAINING MARKET SHARE
Nevertheless, CEO John Lyttle insisted his charge had delivered ‘strong growth over the last two years, which has translated into significant market share gains.’
Lyttle also expressed confidence that pandemic-related headwinds were ‘short-term in their nature, and our focus is to ensure the business is well positioned for growth as these headwinds ease.’
THE EXPERTS’ VIEW
AJ Bell investment director Russ Mould commented: ‘Fast growth has been the name of the game for Boohoo for so long. The rhyme might have to change given the financial pressures on consumers from rising inflation.
‘With food and energy bills taking up a greater proportion of its target market’s take-home pay, there will be less money available for discretionary spending such as buying a new dress from Boohoo.
‘The company’s growth expectations were pared back after last year’s profit warning, and it is hard to see Boohoo achieving anything above low double-digit sales growth this year at best.
‘A bigger concern is how Boohoo will cope with cost pressures which look like they could intensify. One can only expect profit margins to be squeezed further.’
While Liberum Capital continues to believe in Boohoo’s long-term potential and sees a path for recovery to the medium-term growth targets, the broker concedes ‘it will be a long road. On valuation grounds we are a Buy, but as a team we were torn with near term catalysts absent.’
The broker also warned Boohoo’s pricing ability is ‘limited in the current inflationary environment where its target customer demographic is impacted by increased cost of living, and competition from the emergence of direct-to-consumer players from China is increasing.’
Shore Capital reiterated its ‘buy’ rating on Boohoo, highlighting its ‘structurally higher EBITDA margin than others who also sell third party brands, given the own label focus of the company’.
The broker stressed that despite Boohoo’s underperformance outside the UK and some volatility until the supply chain issues normalise, the digital clothing seller will recover ground.
‘Faster delivery times remain the critical competitive advantage, while the recent extension into mid-market brands should inoculate boohoo from competitive threats. Boohoo has demonstrated a great degree of adaptability and built a portfolio of brands (organic and acquired) that allow it to focus on a broader market with enhanced segmentation.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
