Meeting even diminished expectations is proving too much of a challenge for Boohoo. The plunge in the value of the pound and the prospect of a more severe downturn in Britain, its home — and by far its largest — market, mean that even lowering the bar again might not save the fast-fashion retailer from disappointing full-year results.
Boohoo has cut its profit guidance for the 12 months to the end of February next year, now forecasting an adjusted margin of 3 per cent to 5 per cent this year, down from a range of 4 per cent to 7 per cent. An improvement in sales is no longer expected to materialise this year, with the 10 per cent slide in revenue expected to repeat over the second half. The middle of that range implies adjusted earnings before tax and other charges of £72 million, according to analysts at RBC Capital, 26 per cent lower than the previous consensus prediction.
The shares have lost not only all their pandemic gains but also almost all those generated since the group’s float on Aim in 2014. And yet leading investors think the shares have further to fall. The stock is the most-shorted in London and bets against the ecommerce group have gone from zero to 10 per cent of outstanding share capital in less than 18 months. Not even a relatively cheap valuation should keep shareholders hanging on. The shares trade at a mere 17 times forward earnings, far below the historical average multiple of 37, a decline more than justified by weaker growth prospects and declining revenue.
The economic storm is perfect for sinking Boohoo’s profitability. Discretionary consumer spending is falling and cost inflation is hitting the margin in the form of higher freight, wage and product costs. The slide in revenue accelerated to 11 per cent over the three months to the end of August, from an annual reverse of 8 per cent during the previous three months. The excuse of tough annual comparables is also wearing thinner — revenue growth had slowed to 9 per cent during the second quarter of last year.
Boohoo has already prepared for a slide in demand for its cheap garb, but the question is how well. Inventory levels at the end of August were 15 per cent lower than they were at the end of February, but that might not save the company from more rampant discounting if the decline in sales is steeper than it imagined.
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Investing in property and expanding its online distribution capacity both here and stateside have pushed the group into £10.4 million of net debt at the end of August, from net cash of £98.4 million at the same point last year. Capital expenditure is expected to be between £100 million and £120 million in this financial year, which implies a step-up in spending during the second half of the year.
Higher spending could mean a further increase in debt, which analysts at Shore Capital expect to end February at a net £97.5 million before widening again to £131 million at the end of February 2024. That is at a time when interest rates are expected to rise sharply and to peak at 5.8 per cent in May next year.
Rising interest rates mean guidance for financing costs this year has been increased to between £10 million and £11 million this year, from the £7 million to £8 million previously anticipated. Drawing on more of its credit facility, to fund capital expenditure at a time when cash generated by the business is lower, should push those financing costs higher next year. Servicing debt might not take a big slice out of Boohoo’s bottom line, but it comes at a time when the retailer is dangerously close to swinging to an adjusted pre-tax loss this year.
ADVICE Avoid
WHY There is a high risk of Boohoo missing profit guidance again at the full year
Biotech Growth Trust
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Biotechnology companies are obvious and easy losers in a market where inflation is at heightened levels and central banks are set to raise interest rates aggressively.
First, there is the shift away from stocks priced for high future growth; second, there is the prospect that companies burning through higher levels of cash to finance research and development might need to come back to the market to raise capital. The latter is particularly unpalatable at the moment as the cost of debt rises rapidly.
For Biotech Growth Trust, which invests in early stage biotechnology companies worldwide, the result has been a rapid fall from grace. Since the start of last year its shares have fallen by 36 per cent and have reversed the investment trust’s premium to a discount of just over 8 per cent.
Small-cap biotech companies have been badly punished compared with mid or large-cap constituents, which explains Biotech Growth’s wider discount against peers such as International Biotechnology and WorldWide Healthcare. The passage of American drug pricing reforms is another headwind. Conversely, the reforms from 2026 do remove one uncertainty that has stymied the sector.
The performance versus the benchmark, the Nasdaq Biotech Index, is more encouraging. Over the past decade, the shares have delivered a total return of 236 per cent, against 157 per cent from the index, and have suffered a less brutal sell-off over the past 12 months.
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The trust’s top ten holdings are a good mix of those generating substantial revenue, such as Horizon Therapeutics, the rare diseases specialist, and those that are not, such as Syndax Pharmaceuticals, the cancer drug developer. Commercialising medicines is one catalyst for spurring a higher share price for the trust’s holdings, while a takeover offer from a larger pharmaceutical group is another. With potential targets in the United States, where most of the trust’s holdings are based, trading at much cheaper valuations, the second could be more forthcoming in the near term. Any substantial rerating might materialise over the longer term.
ADVICE Hold
WHY Cheap values make up for inflation and higher rates
