Boohoo sales boom falls on deaf ears

by Graeme Evans from interactive investor |

With multiple peaks and troughs, Boohoo's share price chart is not for the fainthearted. Graeme Evans studies the latest update for signs of stability.

Despite putting rival ASOS (LSE:ASC) in the shade over Christmas, there was to be no icing on the stockmarket cake for fast fashion upstart Boohoo (LSE:BOO) today.

A fresh bout of retail jitters put paid to any hopes that Manchester-based Boohoo might overhaul the market valuation of fellow AIM-listed stock ASOS, which last month stunned investors with a hefty warning on profits.

As it happened, ASOS is still marginally ahead at about £2.3 billion after both stocks fell by some 4% in the wake of Boohoo's strong festive update today.

Sales growth of 44% for the four months to December 31 was better than the 40% widely predicted, prompting the company behind the brands Nasty Gal and PrettyLittleThing to raise its guidance for the year to February 28.

What most impressed analysts, however, was Boohoo's margin performance as the tactical deployment of promotions helped it to manage the difficulties faced by ASOS and others in the Black Friday month of November.

This meant a 170-basis point improvement in the gross margin to 54.2%, at a time when heavy discounting impacted on the profitability of other listed stocks.

Source: TradingView (*)  Past performance is not a guide to future performance

Analysts at Zeus said:

"This impressive gross margin performance reflects the strengths of Boohoo’s brand-led model, giving it the ability to be more aggressive in its price positioning as and when the market demands."

Concern over the margin outlook had been a major sticking point for shares in the past year, alongside fears that the stock had got ahead of itself after a spectacular 2016 and 2017 in which it surged by more than 400%.

Boohoo shares peaked at 234p in September, only to fall back to 161p in early December. They have been in recovery mode so far in 2019 amid signs that conditions in retail haven’t been as bad as feared.

The shares have been trading on a 2019 price/earnings multiple of 48.1x, falling to 41.1x in 2020. But when taking into account forecast earnings growth, Zeus said Boohoo was priced at a notable discount to ASOS and Zalando.

Among other analysts, Investec Securities thinks shares can reach 340p while Peel Hunt has a price target of 300p. Investec analyst Ben Hunt said:

"With earnings momentum remaining positive, we think the shares deserve to re-rate back to prior levels."

One factor behind today's sell-off is likely to be some disappointment that sales growth at the core Boohoo brand was 15% rather than the 18% expected. In contrast, PrettyLittleThing revenues jumped 95% and NastyGal was 74% higher.

Boohoo raised eyebrows in retail circles in December when it issued an upbeat trading update on the day of ASOS's shock profits warning.

ASOS blamed its woes on the high level of discounting and promotional activity across the market, coupled with unseasonably warm weather.

Whereas the new forecast from ASOS pointed to annual sales growth of 15%, UBS had previously anticipated growth of 24.7%. A projected cut in the earnings before interest margin to a slender 2%, compared with the 4.1% forecast.

The update prompted brokers to slash as much as 65% from their previously lofty price targets.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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