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Boohoo hit by cost storm

Profits have plunged at the fast-fashion brand as a result of inflation
May 4, 2022
  • Profit margins shrink 
  • Customer base keeps growing 

After an excellent lockdown – operationally speaking, at least – Boohoo (BOO) has fallen back to earth with a bump. The fast-fashion retailer has reported a 28 per cent fall in adjusted cash profit, and a 94 per cent drop in pre-tax profits, despite having more customers than ever.

Boohoo has been buffeted by a number of headwinds over the past year. Freight and logistics cost inflation reduced its Ebitda by around £60mn, while its marketing costs rose by £22mn, driven by weaker demand and the need to get new brands off the ground.

As such, Boohoo’s adjusted Ebitda margin has shrunk from 10 per cent to just 6.3 per cent. This doesn’t account for £36mn of non-recurring costs, including legal expenses, redundancy costs, inefficiency costs within warehouses and irrecoverable sales taxes on customer returns. 

The company remains popular with its young audience. Active customer numbers across the group have risen by 43 per cent over the past two years to 20mn, and people are ordering more frequently from the website. The average order value is also on the rise, up 8 per cent year-on-year at £48.16. 

This is not the full story, however: customer returns are also rising steeply. In the UK – which accounts for 61 per cent of revenue – a third of purchases are now being sent back, compared with less than a quarter in 2021. Meanwhile, in the US, lengthy delivery times have subdued demand for the group’s established brands. 

Cost pressures look likely to linger into next year. Boohoo predicts that revenue growth in the first half of 2023 will be flat, citing uncertain consumer demand, customer returns, tough comparatives, and freight-related headwinds. The group will also have to grapple with wage inflation, including a 6.6 per cent increase in the national living wage. Management said it will try to mitigate some of these pressures by increasing the price of its products, but this risks alienating its cost-conscious customer-base. 

Boohoo’s stock levels are also worth keeping an eye on. The value of its inventory has almost doubled year-on-year, from £145mn to £279mn, and now accounts for 61 per cent of its current assets. Whether the retailer will be able to sell this stock is another story, however, given how quickly fashions change.

Analysts at Jefferies reduced their Ebitda forecast for 2023 by 18 per cent in wake of Boohoo's results. However, they argue that the retailer has built a “more developed” business through the pandemic, with more brands, more customers, more market share and more infrastructure. Whether sales growth will translate into profit growth is now the question. Hold.

Last IC View: Hold, 226p, 30 Sep 2021

BOOHOO GROUP (BOO)   
ORD PRICE:69.7pMARKET VALUE:£ 885m
TOUCH:69.6-69.8p12-MONTH HIGH:347pLOW: 63p
DIVIDEND YIELD:NILPE RATIO:NA
NET ASSET VALUE:37p*NET DEBT:12%
Year to 28 FebTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20180.5843.32.78nil
20190.8659.93.78nil
20201.2392.25.48nil
20211.751257.43nil
20221.987.80-0.32nil
% change+13-94--
Ex-div:na   
Payment:na   
*Includes intangible assets of £129mn, or 10p per share