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Published
Jan 25, 2023
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News analysis: will it be a long road back to profit for Boohoo Group?

Published
Jan 25, 2023

Recent trading updates for retailers and e-tailers have shown us a number of things – Christmas wasn't as bad as many expected it would be, physical retail bounced back strongly as consumers embraced store shopping (for a variety of reasons), and online sellers faced big challenges.


PrettyLittleThing


 
Of the most prominent online names, Boohoo Group was perhaps the most challenged. While rival ASOS saw sales falling but its share price rising after its trading update, the Boohoo share price continue to fall once it delivered its own trading news. 
 
And the update from physical-stores-only retailer Primark this week seemed to add to the woes Boohoo is facing, with Primark proving that its reliance on physical spaces doesn't make it the dinosaur some commentators had expected it to become. Its finance chief even said he thinks it’s the online market that’s now “mature”, the implication being that e-growth will be hard to come by.

So what does this all mean for Boohoo and is its golden age really over?
 
PLUNGING SHARE PRICE
 
Boohoo Group first listed its shares nine years ago and they steadily climbed to be worth over £4 each during 2020 as the company rode the pandemic-linked online boom. 
 
The owner of Boohoo, PrettyLittleThing and Nasty Gal also snapped up distressed brands including Debenhams, Dorothy Perkins, Wallis, Oasis and Warehouse
 
It envisioned a potential market value of £7.55 billion for the enlarged group within three years (so that would be now) and put an executive plan in place that would reward the leadership team with millions for achieving an elevated valuation.
 
But based on the current share price below 44p, the market value of the firm is currently only £0.55 billion. Ouch!
 
A TSUNAMI OF PROBLEMS
 
That's partly a reflection of changing conditions in the wider UK and international retail market, but also a reflection of company-specific issues.
 
As well as having to integrate its acquired brands, Boohoo has had to deal with negative press from supply chain scandals (and invest heavily in putting things right) and has faced some big sales roadblocks. 


Debenhams


 
Logistics hitches stopped it getting goods to customers abroad promptly; competition from fast-growing Chinese rival Shein (which has out-Boohoo’d the company with even cheaper, faster fashion) has intensified; some consumers have turned away from fast fashion on sustainability grounds; many have changed their behaviour, buying clothing that's more like to be returned compared to the easy-fit loungewear they bought during the pandemic; and shoppers hit by the cost-of-living crisis have thought twice about buying new clothes.
 
What seemed like key strengths in recent years (ultra-fast fashion, ultra-low prices and its online-only model) now seem like weaknesses. Inflation has increased its costs and forced it to choose between price controls and margins; fast-fashion as a concept is under assault from an increasingly eco- and ethically-focused world; and shoppers have re-embraced physical stores post-Covid in a way nobody thought likely.
 
Criticism of budget fashion rival Primark for being out of step by not selling online now looks to have been misplaced as it bounced back strongly and continues to invest heavily in new and existing physical stores to make them places that consumers really want to visit.
 
That Primark comment that online is now a mature segment suggests that its leading lights might not be able to look forward to spectacular growth in the future.
 
THE UPSIDE VIEW
 
That doesn’t mean it’s game over for Boohoo. After all, sales in the four months to the end of December may have fallen 11%, but they were up 35% against the pre-Covid period and were still at £1.5 billion. Boohoo remains a significant force in the UK and international fashion sector and with its expanding beauty ops (and purchase of Debenhams), in beauty too.
 
But its recovery could take some time to work through. While it may not take as long as what seems to be the firm recovery now in place at retail giant M&S (which has been in turnaround mode for many years), it won’t be quick.
 
Last week, analysts at Panmure Gordon suggested Boohoo won’t swing from loss-making to break-even until its 2024/25 financial year.
 
They commented on “the vulnerability of its distribution mis-match with its geographic sales aspirations” and said they “have sympathy with a company encouraged to grow fast being impacted by unprecedented conditions”. But they added that “mistakes have clearly been made here as well”.


Oasis


 
Analysts seem to have a similar view of Boohoo that they have of rival ASOS (one commented after the latter’s update that “the group is heading in the right direction… [but] it won’t be a quick fix and ASOS has a mountain to climb to rediscover its former glory”).
 
So what could help Boohoo discover its own former glory, if it ever does so? 
 
An investor note from Jefferies analysts seen by Fashionnetwork.com was relatively upbeat. It highlighted the significant headwinds such as the “pandemic-impacted delivery proposition, higher freight costs, and elevated returns rates” that slowed top-line growth. But its analysts “continue to believe these headwinds are largely transitory in nature”, although macro pressures on consumers have pushed the recovery date later.
 
Jefferies (which like other analysts is still suggesting investors buy Boohoo shares) said “stock and costs are being notably well managed. Underpinned by its agile test-and-repeat model alongside improvements in supply chain speed, Boohoo is successfully managing its stock position despite the continued challenges in the trading backdrop”. 
 
Inventory has been reduced by 27% YoY, “a substantially more rapid rate than some peers” and it expects “a robust gross margin improvement in the final period”. Overheads are also being managed tightly (Boohoo isn’t sitting back and measures include redundancies in both Manchester and London).
 
Jefferies also talked up the launch of the US distribution centre and efficiency benefits from cost management and automation in the UK. The US hub is expected to launch with a phased approach in 2023 and early 2024. This will be hugely important, especially given the firm saying in its last set of half-year results that performance in the US was below expectations, with revenue declining 29%. Delivery times to the US were “elevated compared to pre-pandemic levels”, and this was “undoubtedly” hurt demand.
 
Whether all that means the share price will recover is open to question. Those Jefferies analysts see an “upside scenario” of a share price at £1.35, with its base case at 85p. Yes, that’s well above today’s price but way down from the earlier £4+. And with a “downside scenario” of a 30p share price, it’s clear Boohoo isn’t out of the woods. 

It may never achieve the value it once enjoyed, instead — like M&S — having to be content with a recovery that improves its position but doesn’t match past glories. But it’s clear that it’s way too early to write Boohoo off.

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