Boohoo lowers full-year expectations

Boohoo (BOO) has been plagued by the serious allegations about its supply chain practices that emerged in July 2020. UK suppliers were accused of paying staff illegally low wages and exposing them to unnecessary Covid-19 risks. The fashion retailer’s share price has fallen by almost 40 per cent over the past year, with a 10 per cent drop on results day. While the group posted record first-half revenue and has doubled its UK and US market share over the past two years, the market noted downgrades in operating profit expectations for the full year and £26m of pandemic-related distribution costs which hit the bottom line.

The supplier scandal saw top 10 shareholder Abrdn (ABDN) and ESG-focused funds divest, citing concerns that the group’s response to events wasn’t sufficient. Management emphasised in the interim results that 28 out of 34 improvement actions from the independent review into supplier practices have been implemented, with the rest to be completed “in the coming months”. It remains to be seen whether the impact of the saga on the group’s reputation will keep the share price low.  

Growth rates slowed significantly in the second quarter due to consumer uncertainty and return rates increasing as rivals' physical stores reopened. UK sales, the group’s biggest revenue driver, grew by 19 per cent in the second quarter against 50 per cent in the first, while North American growth slowed from 43 per cent to 8 per cent. Management said that weaker international growth was due to the impact of lockdowns and longer delivery times. Adjusted Ebitda margin for the year is now expected to be 9-9.5 per cent rather than 9.5-10 per cent due to the impact of freight and wage inflation.

The group’s 2021 acquisitions of intellectual property assets, including from Debenhams and Dorothy Perkins, have allowed it to expand its customer base beyond the youth market. Management thinks Boohoo can reach 500m customers with its expanded brand offering. Record capital expenditure of £172m in the interim period included spend on the integration of these assets.

Davy Research analysts hold that Boohoo’s valuation is “undemanding” and will become increasingly attractive. A forward PE ratio of 22 times is high when set against competitors, but with FactSet consensus estimates pointing to a fall to 17 times forecast earnings in FY2023 it looks more reasonable. With the supplier scandal still looming over its head, however, Boohoo remains a mixed bag. Hold.

Last IC view: Hold, 317p, 5 May 2021