Interactive Investor

Stockwatch: why Boohoo is struggling to regain momentum

27th August 2021 11:11

Edmond Jackson from interactive investor

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Our stocks columnist examines the fast-fashion giant as competition in the sector heats up. 

While I am driven by company fundamentals, at times I also pay attention to the balance of sentiment in a stock – which some might say is captured perfectly by its chart. 

Ideally, you would hold stocks with positive underlying momentum of the business and with contented shareholders.This creates a self- reinforcing upward bias – a classic bull trend. 

Life is rarely so perfect however, and even the best charts experience a setback. Whether the business hits some kind of upset or the stock gets over-inflated then plunges on profit-taking, it has to grope for a new equilibrium. 

Just as with the early stages of romance, once the positive vibes are disrupted, they may not regain same strength. Clothing retailer ASOS (LSE:ASC) had a phenomenal run from 5p to £66 over a decade or so to 2014, and then slumped to £23.

It rallied again to £73 by spring 2018 but plunged £18 in the March 2020 Covid sell-off. Currently around £40, ASOS trades on a forward price earnings (PE) in the mid-twenties but in recent years its earnings growth rate has been all over the place – minus 70% to 5% to 320% - and is currently projected to grow by 17% easing to 5%.  

It is partly because fast-growers attract competition and it gets harder to assert fair value, hence stocks are governed as much by sentiment. 

Boohoo has followed the ASOS pattern near perfectly 

This rival fashion retailer Boohoo (LSE:BOO) has in recent years turned quite similarly volatile. I was a fan from 35p in November 2015, given its management was highly-attuned to digital commerce – setting fashion trends via social media – and the company had a strong balance sheet and cash flow.

Its PE rating around 30x was at least half of that for ASOS at the time yet Boohoo appeared the more promising business. 

The stock advanced to 250p by September 2017 when I became edgy how it had leap-frogged ASOS - on circa 60x projected earnings per share and 100x those historic: “At current levels, there is no margin of safety and sentiment predominates. Selling is prudent given capital protection is the first rule of investing.” 

In due credit, Boohoo traded briefly over 400p in June 2020 when it adeptly capitalised on online sales during Covid lockdown, but the company has faced two headwinds that took its stock down to 260p earlier this month, currently 279p. 

Around £40 a share currently, ASOS is capitalised at £4.0 billion and trades on 25x projected earnings per share (EPS), albeit is expected to grow them only by 17% and 5% in the next two years.

Meanwhile, at 279p, Boohoo is capitalised at £3.6 billion on a 24x PE and targeted to grow EPS by 40% and 26%.  

Mind, a “heavy” share price bears no relation to value; it simply relates to the extent of shares issued. A price of many pounds could reflect how well the business has done over years, self-funding growth rather than diluting shareholders. 

Twin issues disrupting sentiment in Boohoo’s stock 

First, controversy over “sweatshop” conditions among suppliers in Leicester has dragged on. The company did make a vigorous response and to be fair, if people want to buy very cheap clothes, then workers somewhere in the world get low-paid.

Lately however, this has run into “environmental, social, governance” stipulations where institutional investors may only hold ESG-compliant stocks. Everyone has their own view as to “fair” wages in the rag trade.  

Second, Boohoo’s success is inevitably attracting competition – in particular from Shein, a privately owned Chinese online retailer that is becoming very popular with young people globally.

Similar to Boohoo, it combines innovation with low price - rapidly generating new designs, testing batches and adjusting production according to demand. This process appears even more vigorous than Boohoo, with up to anything like 5,000 daily new products. Production is from a network of factories and suppliers around Guangzhou.  

The generic nature of Shein’s brand may also be part of its success. For at least six months after Google started prompting me with its home products, I had no sense of it being Chinese.  

Who will succeed most in the US, or there is room for both? 

Shein’s shopping app has overtaken Amazon (NASDAQ:AMZN)’s as the most frequently downloaded in the US – where hopes have been high for Boohoo to generate sales momentum - and it also rates a leading app in the UK.

While the two companies are now equal in terms of website hits, Shein’s app appears to be doing better than Boohoo’s whether via Android or Apple, and its advertisements are all over Facebook. 

The US is currently Boohoo’s fastest-growing geographic segment. Its annual accounts to 28 February 2021 show US revenues growing 65% to £435 million to represent 25% of group total, versus the UK up 39% to £945 million for 54% of total.  

While the US market ought to be big enough to accommodate both firms, sentiment towards Boohoo has faltered amid fear of greater competition in this key market.  

Otherwise among Boohoo’s annual revenues, continental Europe rose 30% to £245 million to represent 14% of total, with “rest of world” up 19% to £120 million at 7% of total.   

Modest tailwind of teenagers and Gen Z

Boohoo ought to benefit modestly from a positive UK demographic, where the number of 18-year-olds has begun to rise sharply from 715,000 in 2020 and a 25% rise to 830,000 is expected by 2030. 

There seems a question mark for demand however, in terms of the ethics of Generation Z - those born from the mid-1990s to early 2010s.

Whether their professed concern for the environment and social justice tempers demand for the latest clothes and promptly discarding them to buy new – a behavioural trait that is dreadful for the planet and keeps wages suppressed as suppliers feed youngsters’ hyper-active buying.  

For the time being, it seems Generation Z is more driven by affordable self-expression.   

Boohoo - financial summary
Year end 28 Feb

  2016 2017 2018 2019 2020 2021
Turnover (£ million) 195 295 580 857 1,235 1,745
Operating margin (%) 7.7 10.3 7.4 6.9 7.4 7.1
Operating profit (£m) 15.0 30.3 42.7 58.7 90.9 124
Net profit (£m) 12.4 24.5 31.7 43.6 63.7 90.7
Reported EPS (p) 1.1 2.2 2.7 3.7 5.4 7.2
Normalised EPS (p) 1.1 2.1 2.7 4.2 5.3 7.6
Earnings per share growth (%) 33.5 86.8 32.0 53.3 26.7 44.0
Price/earnings multiple (x)           36.7
Return on capital (%) 20.3 26.4 19.2 21.1 25.9 25.3
Operating cashflow/share (p) 1.5 2.6 5.9 8.7 9.7 13.0
Capex/share (p) 1.2 2.7 4.0 4.0 3.8 9.8
Free cashflow/share (p) 0.3 -0.1 1.9 4.7 5.9 3.2
Cash (£m) 58.3 70.3 143 198 245 276
Net debt (£m) -58.3 -58.4 -133 -191 -225 -258
Net assets/share (p) 6.5 8.6 17.7 21.6 26.6 37.4

Source: historic company REFS and company accounts

Non-executive director has accumulated material equity 

Is worth noting as a judgment call: 

Mid last June, Iain McDonald bought a total 100,000 shares near 327p, taking his stage to 721,336 shares.

It represents a material “add” than token purchase by a new director, and McDonald has an interesting perspective having been a retail/e-commerce analyst at various investment banks, and having founded his own investment company. That also implies he likely has money to spare.  

Mind, he also bought 100,000 shares at 335p last February, a purchase now 15% below water. 

Previously, he bought 50,000 CFDs at 227p in July 2020, after which the price rose by around 70% over the following 10 weeks. 

Swirling eddies around Boohoo 

This director’s trading neatly illustrates a moral of Heraclitus, the ancient Greek philosopher, who declared: “No man ever steps into the same river twice”. His sense was that everything changes, nothing stands still and newer waters forever flow. 

The stock’s current rating looks fair amid uncertainties over competition in particular: with fresh money I would await more evidence in the figures, how Boohoo stands. 

It has spent the last year within a 250p to 375p, sideways range reflecting lack of conviction. I side with chartists who might say, better to see a fresh uptrend before buying in. Hold. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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