Online fashion retailer Boohoo (BOO:AIM) has warned profits for the year to next February will be much lower than previously expected, news that sent the shares tumbling 14% to 118.6p, where they nestle just above their five-year low.
The Manchester-based dresses-to-tops purveyor blamed a spike in product returns rates and rising freight costs for a major downgrade to full year sales growth and margin guidance.
And the comment that developments surrounding the Omicron variant could ‘pose further demand uncertainty and elevated returns rates particularly in January and February’ also unsettled investors.
SALES GROWTH SLOWS
Boohoo now expects to deliver sales growth of 12% to 14% this year, a massive downgrade from previous guidance of 20% to 25% growth. The annual adjusted EBITDA margin is expected to be 6% to 7%, below earlier guidance of 9% to 9.5% and implying adjusted EBITDA of between £117 million to £139 million for the year.
The web-based retailer, which snapped up the Debenhams, Dorothy Perkins, Wallis and Burton brands at the beginning of 2021, said sales growth has slowed and costs have risen due to the impact of ‘significantly higher’ returns rates.
Not only has Boohoo been clobbered by ongoing disruption to its international deliveries, which has dampened overseas demand, it is also feeling the margin pinch from ‘significant’ and ongoing pandemic-related inbound freight cost inflation.
Whereas UK sales rose by 32% year-on-year in the third quarter to November, sales were in negative territory in the USA, Rest of Europe and Rest of World regions.
HEADWINDS ARE ‘TRANSIENT IN NATURE’
Management insisted that the factors currently negatively impacting Boohoo are ‘transient in nature’.
As CEO John Lyttle explained: ‘The current headwinds are short term and we expect them to soften when pandemic related disruption begins to ease. Looking ahead, we are encouraged by the strong performance in the UK, which clearly validates the boohoo model.
‘Our focus is now on improving the international proposition through continued investment in our global distribution network, capable of delivering in excess of £5 billion of net sales, to support future growth.’
THE EXPERT’S VIEW
Russ Mould, investment director at AJ Bell, commented: ‘Concerns that the Omicron variant is spreading fast do not bode well for the hospitality and leisure sector, and consumers have become more nervous about going out.
‘That could be bad for Boohoo’s near-term sales as there would be less of a reason to buy a new dress or shirt if that special night out has turned into yet another session on the sofa with Netflix.’
Mould continued: ‘Boohoo is taking the view that cost pressures are only temporary, but the pandemic is still raging, and the latest inflation figures would suggest things are getting worse not better.
‘The only way Boohoo is going to win back the market’s favour near term is if revenue growth rates accelerate dramatically and it’s really hard to see that happening in the current environment.’
Disclaimer: The author and editor of this story both own shares in AJ Bell Limited, owner and publisher of Shares magazine
