Trading On margin

Will spending keep Boohoo’s stock price from recovering?

youK online fashion retailer Boohoo [BOO] warned of slowing growth when it released its fiscal 2021 results in May, as supply chain compression, disruption of international deliveries, rising transportation costs and a increase in the number of customers returning products weighed on the company and its valuation. The company’s first quarter business update on June 16 is expected to provide an update on how it plans to weather these headwinds.

The group reported a 14% jump in revenue from 2020 for the 12 months to the end of February, but said revenue for the first half of fiscal 2022 would remain flat. First-quarter net sales are expected to fall year-over-year due to an estimated 4-6% increase in product returns over pre-pandemic levels. Sales will increase again in the second quarter, with overall performance expected to be stronger in the second half.

The company said the strategic focus will be on retaining market share gains made during the pandemic. It will look to tap into its diverse portfolio of brands, including recent acquisitions Burton, Debenhams, Dorothy Perkins and Wallis.

All eyes on capital spending

Investors will pay close attention to capex and EBITDA margin when the first quarter business update is released on Thursday.

Investments in new brands and shipping-related costs of £60m impacted Adjusted EBITDA in 2021, which was £125.1m, down down 28% from 2020, while pre-tax profit fell 94% to £7.8m. Capex was £261.5 million as the company embarked on a mission to expand and automate its distribution network. A new center is expected to open in the United States in 2024.

Equity researchers at Hargreaves Lansdown warned that if it “turns out to be a systematic slowdown in sales, and not just a hiccup, those extra warehouses will become a big problem for earnings.”

As costs weigh heavily, adjusted EBITDA margins are expected to be between 4% and 7% in 2022, compared to 6.3% in 2021 and 10% in 2020. Boohoo said it will have to raise product prices to try to prevent the margins from eroding further.

“Significant infrastructure spending means the balance sheet is not as strong as it has been in the past, but there is still a small amount of net cash on the books. We are looking at [capex] up close though. If a company is struggling to stick to its capital budget, it can signal trouble. If prolonged, it could damage the balance sheet,” the Hargreaves Lansdown researchers noted.

Liberum analyst Wayne Brown criticized management’s focus on capital spending. “With shrinking margins, hard-to-get sales, and competition as fierce as we’ve ever seen, racking up debt and carrying out expensive capital projects seems like an unfortunate time,” he wrote in a note seen by the FinancialTimes.

A bumpy ride ahead

Overall, these headwinds put Boohoo’s stock price under pressure. It fell 42.8% year-to-date to the June 10 close at 70.44p. After hitting a 52-week high of 337p on June 15 last year, the stock is trading 11.2% above its 52-week low of 63.32p on March 7 and is at its lowest level in almost six years.

“Boohoo’s valuation has fallen significantly as these challenges become more apparent, which may present a longer-term opportunity. However, with so much uncertainty ahead, investors should expect a bumpy ride,” argued the Hargreaves Lansdown researchers.

Nevertheless, analysts are generally optimistic. MarketBeat data shows Boohoo shares have six “buy”, three “hold” and two “sell” ratings. The consensus price target is 255.5p, up 262.7% from the June 10 closing price.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not expressing opinions) is provided for informational purposes only and does not take into account your personal circumstances or objectives. Nothing in this document is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically restricted from processing prior to providing such material, we do not seek to take advantage of the material prior to its dissemination.