Boohoo's acquisition offers expansion potential

Earlier this month the group announced it had bought Karen Millen and Coast – two formerly well-loved high-street fashion brands – out of administration. While both brands have sizeable bricks-and-mortar operations, Boohoo is only buying the online operations and intellectual property, bringing around 125 of the companies’ 1,100 associated staff into the group and maintaining its own position as a pure-play online retailer. 

The deal will cost Boohoo £18.2m, funded out of its sizeable cash reserves. In the financial year to February 2019, the acquired companies generated direct online sales – excluding those made through third-party websites – of £28.4m, which represented 16 per cent of the brands’ total revenues. While sales are minuscule compared with the group as a whole, the real significance of the deal is to expand Boohoo's reach into a new demographic as part of its strategy to grow its multi-brand platform. Karen Millen and Coast have a different target audience to Boohoo, operating primarily in the 25-45 year-old age bracket. 

The deal is not without its critics, though. An analyst from consultancy GlobalData described Boohoo as “an unlikely suitor”, citing the difference in demographics along with its traditional focus on high volume sales, frequent promotions and social media marketing in contrast to Karen Millen and Coast’s “high-quality product and sophisticated designs”. However, if Boohoo can replicate the success it has had with youth brands with older shoppers, the acquisition stands to pay off very handsomely.

Boohoo has proven its ability to grow acquired brands. Management said it hasn’t ever seen a fashion brand grow as quickly as PrettyLittleThing – in which it acquired a 66 per cent interest in January 2017 – after the brand grew sales 107 per cent in the most recent financial year to £374m. Meanwhile, Nasty Gal, which was acquired in February 2017, was close behind, doubling sales to £48m. However, given the target demographics of the group’s four main brands all overlap considerably, there is an open question about how long such stellar growth can be maintained. Karen Millen and Coast open up a potential new market for growth, and success there would build faith in the group’s ability to appeal to a wide range of customers. Success revitalising down-at-heel high-street brands as online players would offer abundant opportunities for further acquisitions, especially given the current state of UK retail. 

The group’s various brands all share the same platform of technology, supply chain and processes, which it believes will allow it to quickly integrate the new brands and begin driving growth. Canny marketing spending is key to driving sales and last year these costs accounted for 9.4 per cent of sales.

As might be expected for a fast-fashion group with high volumes, the group does not have high margins. The adjusted cash profits margin was 9.9 per cent in 2019, and management expects to maintain that level as sales grow – which it expects to happen at a rate of 25-30 per cent this year. The group is also highly cash generative while the modest capital needs of its online-only model has helped it achieve a return on capital employed (ROCE) above 25 per cent for the last three year despite the low margin. The balance sheet also provides plenty of potential for further acquisitions, with year-end net cash up 43 per cent at £191m. Meanwhile, capital expenditure is expected to come in at £50m-£60m this year compared with £48.6m last year.