Loss-making Boohoo plots a route to recovery

Fast fashion merchant Boohoo (BOO) wants to make amends for its plummeting profitability. But management has warned investors that things are going to get worse before they get better. 

In a best case scenario, bosses said revenues for FY 2024 will flatline – and at worst they’ll fall by an additional 5 per cent on the prior year. Things are expected to be particularly bad in the first half before sales growth returns thanks to the aptly-named “back to growth strategy”. 

One of the central goals of this plan is to reduce the number of returns made by customers. Boohoo’s gross sales before returns were flat in its last financial year. However, return rates shot above pre-pandemic levels, thereby impacting net sales growth. 

The gross profit margin also fell to 50.6 per cent in the year to 28 February (from 52.5 per cent in 2022). The company attributed this to the fall in sales, as well as the soaring costs of freight, energy and labour.

Boohoo, nonetheless, closed its last financial year with £331mn of cash in the bank, and access to a £325mn revolving credit facility until 2025. This leaves it in a strong liquidity position, which should be reassuring for investors. 

International expansion is another key pillar of the group’s growth strategy – albeit a shaky one. Extended delivery times continue to impact its customer proposition overseas and distribution costs remain high. These headwinds, and others, could ultimately restrict Boohoo’s margin recovery. 

“Following the stock’s recent re-rating we view valuation…as demanding, considering the risks of earnings disappointment,” said RBC analysts. Shares trade on around 10 times enterprise value to Ebitda, so it’s by no means undervalued. We don’t see much cause for optimism – yet. Sell.

Last IC View: Sell, 32p, 28 September 2022