Questor: why we are not ready to lock in our 140pc gain on growing Boohoo just yet

Questor share tip: this clothing retailer’s online focus and acquisition-led business model may mean further share price gains

Robert Stephens 17 February 2021 • 5:00am

Deciding when to lock in profits on a shareholding can be one of the most challenging aspects of investing. Waiting for a higher price risks losing hard-won gains. However, selling too early can mean missing out on further profits.

It is a decision Questor faces following our recommendation to buy online clothing retailer Boohoo in April 2018. Since then, the fast-fashion business has delivered rapid sales and earnings growth. In response, its share price has gained 140pc.

Key to its growth has been a faster shift towards online sales than any retail analyst could realistically have imagined. Covid-19 has accelerated a long-term trend in consumers pivoting from in-store purchases to online transactions. In fact, they increased from 21pc of all retail sales in November 2019 to reach 36pc in the same month of 2020.

A continuation of this trend is widely expected in future. However, Boohoo’s sole focus on digital sales has not been the only catalyst for its share price rise. It has used a solid net cash position that currently stands at £387m to cherry-pick the digital operations of struggling retailers that have failed to adapt to an increasingly online world.

Notable examples include Oasis, Debenhams and a treasure-trove of Arcadia’s fallen retail empire that includes Burton and Dorothy Perkins. Unlike their previous owners, Boohoo will not be required to wind down a bloated and inefficient retail estate. Instead, it can benefit from owning a more diverse range of well known brands that have the potential to widen its customer base.

Recent acquisitions also offer the prospect of a broader product range. The company intends to move into homeware sales, which have proved popular in the pandemic, following its acquisition of Debenhams. Other opportunities include a wider range of beauty products, which could have a positive impact on margins.

In our view, an eventual end to lockdown measures may be a double-edged sword for the company. It could encourage a period of slower online sales growth in the short run, as consumers enjoy the novelty of shopping in store. However, this could be more than offset by a likely improvement in consumer sentiment in the long run. Shoppers may also have greater reason to buy new clothing when socialising once again becomes possible.

As was the case in our initial recommendation, Boohoo’s shares trade on a heady multiple: 33 times next financial year’s forecast earnings. Perhaps surprisingly, this is lower than the 48 times earnings in our original tip.

Its progress has been interrupted by allegations of poor working conditions in the firm’s supply chain. In response, the company has launched an “agenda for change” programme that aims to strengthen corporate governance and improve standards in its supply chain.

One area in which the company may find adapting more difficult is a possible future change in business rates. Online retailers have benefited from low rateable values on their property vis-à-vis high street rivals. The need to raise taxes in response to Covid-19, as well as growing demand for a level playing field from high street retailers, could be a significant threat facing Boohoo.

In spite of this risk, Questor remains optimistic about the company’s long-term prospects. A likely continuation in digital retail growth and its acquisition-led business model could combine to produce further share price appreciation. For now, at least, locking in profits could mean missing out on further gains.

Questor says: hold

Ticker: BOO

Share price at close: 369.5p

Update: Tesco

Tesco is returning almost £5bn to shareholders via a special dividend that is due to be paid on Feb 26. This works out as 50.93p per ordinary share held as at Feb 12. It follows the sale of the firm’s Thailand and Malaysia businesses.

The retailer’s shares are now trading ex-special dividend. However, a simultaneous 15 for 19 share consolidation means that their price is little changed as a result.

Investors may need to pay tax on the special dividend. This depends on factors such as whether they hold shares outside of a tax-efficient account such as an Isa and if they have already used up their annual dividend allowance. As is the case with any special dividend, the net effect on investor portfolios is expected to be neutral.

In Questor’s view, Tesco’s special dividend is unlikely to have a significant impact on its long-term prospects. The firm’s dominant online position, improving customer loyalty and innovative strategy could lead to further share price gains.

Questor says: hold

Ticker: TSCO

Share price at close: 242.3p