ii view: Boohoo shares hit five-year low

Party dress returns and constrained US air freight capacity. We assess prospects for this UK retailer. 

Third-quarter trading update to 30 November

• Quarterly net sales up 10% to £506 million

Guidance:

• Expects full-year (FY) net sales growth of between 12% to 14%, down from 20% to 25%
• Expects FY adjusted profit margin of between 6% to 7%, down from 9% to 9.5%
• Expects FY adjusted profit (EBITDA) of between £117 million to £139 million

Chief executive John Lyttle said:

"The strong performance in our core UK market, across both our established and acquired brands, demonstrates the potential to capture and grow market share in key markets. In international markets, our proposition continues to be significantly impacted by ongoing service disruption due to the pandemic. 

“The Group has gained significant market share during the pandemic. The current headwinds are short term and we expect them to soften when pandemic related disruption begins to ease.”

ii round-up

Online clothing and fashion accessory retailer Boohoo (LSE:BOO) today cut full-year profit hopes as customers returned more products, and its international operations remained hindered under pandemic delivery constraints. 

Despite elevated UK sales, party dresses in particular were being bought to try and then returned, with only one item often being kept out of a batch. Delivery times for its overseas businesses had lengthened given fulfilment from its UK distribution facilities. These factors had increased costs and reduced demand, with its profit margin now expected to fall to as low as 6% from a previous high of 9.5%.

Boohoo shares fell as much as 20% in opening UK trade, hitting a five-year low. Shares for online rival ASOS (LSE:ASC) also fell by around 5% as investors made a possible read across.

Boohoo’s profit warning makes for its second in just four months. Its shares are now down over 60% year-to-date. ASOS shares have also fallen by more than 55% over that time, although shares for store and online retailer Next (LSE:NXT) are up by just over 10%.

UK Boohoo third-quarter sales remained strong, growing by nearly a third year-over-year to £320 million. Sales in the US fell by 14% to £104.6 million. Air freight capacity across the Atlantic had not recovered as expected given the ongoing pandemic. Sales to Europe fell by 12% to £54 million. 

But management remained confident in its unchanged medium-term profit margin estimate of 10%. Current pandemic related costs are expected to unwind with investment into its infrastructure, including progressing plans for a US distribution centre, supporting its overseas growth ambitions. 

A trading update for the year to the end of February is expected in early March.

ii view:

Coming to the stock market back in 2014, Boohoo is today an online clothing and fashion accessory retailer. Along with Boohoo itself, its other brands include PrettyLittleThing, Nasty Gal, MissPap, Karen Millen, Coast, Debenhams, Dorothy Perkins, Wallis and Burton.

The company previously came under the spotlight regarding concerns about poor working conditions and pay across its clothing supply chain. In response, it commissioned an independent review which made 17 recommendations. Many of these have now been acted on.

For investors, challenges caused by the pandemic cannot be ignored. Despite a lack of store costs, other costs such as returns may be higher than the likes of Next where items can be returned to store. Selling overseas from a UK distribution network is also highlighting the need for more localised distribution hubs, while ethical concerns also need to be remembered. 

More favourably, its products continue to appeal, with UK sales still expanding. Investment in its overseas distribution ability is also being made and action to address ethical concerns has been taken. Some may risk buying Boohoo shares at these multi-year lows because of obvious longer-term potential, but other investors may decide to wait and see given growing pandemic headwinds.

Positives: 

• Geographical diversity
• Growing portfolio of brands

Negatives:

• Elevated pandemic costs
• Ethical concerns

The average rating of stock market analysts:

Strong buy