UK Edition
Questor: Buy Boohoo – after a shaky few months the fast fashion group is back on trend
Hollywood came to Cheshire last month for an Oscars-themed 30th birthday party. Among the gold palm trees mingled stars from Towie, Coronation Street and EastEnders, and a video message was sent by Kris Jenner of the Kardashian clan. Birthday boy, Umar Kamani, had lots to celebrate.
Not only was PrettyLittleThing, the fashion website he founded with his brothers sold for £3.3m in 2016, but the entrepreneur is sat on a 34pc stake with managers that is likely to be bought out in 2022. In the meantime, PLT has been the standout performer for Boohoo.com, the retailer that acquired it – which also happens to be jointly run by Umar’s father, Mahmud.
Investors in Boohoo have had fewer reasons to pop the champagne open recently. The stock had been a runaway success since floating at 50p a share in March 2014. Its fast, affordable fashion for 16 to 30-year-olds, sold exclusively online, convinced the City it had another Asos on its hands. Shareholders were so used to the company outperforming expectations that when Boohoo eventually wobbled it was harshly punished.
At its interim results, pre-tax profits soared by 41pc, but what attracted the headlines was the cost of investing in higher promotional activity and the mix of sales from its different brands. The company said that its underlying margin, forecast at “around 10pc” in June, would be between nine and 10pc for the year.
It does not sound like much of a difference, given that there was plenty of good news in the statement, such as group revenue growth for the year being revised up from 60pc to 80pc – growth that Miss Selfridge, New Look and other high street names can only dream of. But so lofty was Boohoo’s trading multiple that its shares are down more than a third from that point last September on fears the party is over.
Those fears look overdone, and many company followers expect this week’s annual results to reassure. In a sector note recently, N+1 Singer highlighted Boohoo as one stock unfairly caught up in the negative sentiment that has hit the retail sector this year, pointing out its strong balance sheet with net cash and 85 times fixed charge cover.
If the recent retail depression has shaken out some weaker performers, the argument goes that Boohoo is more likely to gain market share over the mid-term. And some consumer stocks must rally as wage growth returns.
Boohoo is more geared to pocket money than monthly salaries. It traces its roots to a Manchester market stall and strives to maintain a low-cost offering. The average price point for dresses, tops, T-shirts and jeans on its main Boohoo and BoohooMAN websites is £13. PLT in particular thrives on social media buzz and celebrity endorsements.
Kourtney Kardashian launched a 40-piece collection on the website last autumn. Also worth mentioning is US fashion site Nasty Gal, which Boohoo took over as it was entering administration to underline its international ambitions.
On a ratio of enterprise value to sales, Barclays pointed out this month that Boohoo was trading on a 20pc premium to Asos and Zalando, a German peer. But on enterprise value to earnings, it is trading close to a 30pc discount to the pair, suggesting the market thinks margins will collapse to 5pc, when the base case is 7pc over the next few years.
There are some concerns. This is a growth stock and with that comes market volatility. What might Amazon achieve in this space? Boohoo also has a lot going on.
Last June it raised £50m to build a giant automated warehouse to cope with £2bn of net sales, on top of the £1bn of sales that its extended Burnley site can handle. Potentially knocking sentiment, four members of the Kamani family still own a third of the company and have been selling down over time.
At least Boohoo has an old hand as chairman in the shape of Peter Williams, the ex-Selfridges veteran. He has sat on more company boards than most teenage girls have crop tops – including a spell as the senior independent director of Asos.
Trading at 48 times this year’s forecast earnings, these shares are a lot pricier than the company’s garments. But fashion is fickle, and Boohoo looks to be back on trend. Buy.