Is it really all boo-hoo-hoo for Boohoo?
“…At its current low price now might be a good time to buy into BooHoo, a company that despite the issues that continue to beset it, many of them self inflicted, has persisted in establishing itself as a dominant force in UK fashion…”
The strengths and weaknesses of online fast-fashion retailer Boohoo Group, (AIM:BOO), one of AIM’s most exciting and volatile trades, have been magnified through the pandemic.
Since the company was founded 15 years ago it has outmanoeuvered its high street rivals and mesmerised the markets, taking advantage of its marketing savvy and flexible business model to offer the very latest designs to its fashion conscious young customers, often just days after their modelling by celebrities. Boohoo’s share price has touched heights of more than 400p in the past five years, taking its valuation near $5bn, twice that of Marks and Spencer. Indeed, in the course of doubling its UK and US market share over the past two years it has swallowed several of its erstwhile competitors, including Debenhams, Burtons and Dorothy Perkins.
But Boohoo also has the capacity to make its shareholders weep. The retailer’s value fell by 40pc last summer in the wake of serious allegations about its supply chain, and by 10pc just last month when its most recent figures failed to meet the market’s expectations. With the company’s share price at its lowest point since the labour conditions scandal hit last year, we take a step back from the day-to-day noise and consider Boohoo’s long-term prospects.
Bucking the trend
We’ll start with the good news that has shone – frequently – through the clouds. While high street retailers suffered through the pandemic’s repeated lockdowns, Boohoo’s capacity to adapt quickly to changing conditions and fashions allowed it to post stellar results through 2020 and much of this year. The company entered 2021 on the crest of soaring UK sales of £661m in the four months to December, up 40pc on the same period in the previous year. It expected group revenue to grow by 36 to 38pc in the full year, up from previous guidance of 28 to 32pc, and in May reported that EDITBA adjusted profits had risen 37pc in the year to 28 February to £174m. UK sales, the company’s biggest market, had risen by two-fifths to £945m. Indeed sales grew across all of its geographic regions as the company’s ‘active’ customers – those who have shopped on its website in the past 12 months – increased by 28pc to 18 million.
The results offered perhaps the most vivid proof yet of Boohoo’s core strength, its ability to anticipate and take advantage of new trends, in this case the consumer turn from formalwear and going-out attire to the ‘lockdown chic’ style of hoodies, joggers and leggings. The company’s net cash position increased by 15pc to £276m, reporting no long- or short-term borrowings even after it had spent £250m on acquisitions in accordance with its long-term strategy to extend its reach beyond its core female 18 to 30 demographic.
Boohoo bought Karen Millen and Coast in August 2019, and Oasis and Warehouse last June, before acquiring the Debenhams brand early this year for £55m. The venerable retailer, which despite the failure of its high street stores is still one of the top 10 online retailers in the UK, with 300 million visits and £400m worth of sales in the year to August 2020, will be run as purely e-commerce business. The acquisition will facilitate Boohoo’s expansion into categories such as beauty, sportswear and homewares, bringing established fashion brands such as Maine, Mantaray and Principles into its fold. A month later Boohoo spent a further £25.2m buying the Burton, Dorothy Perkins and Wallis brands. Burton will be used to extend Boohoo’s limited range of menswear – its existing BoohooMAN brand accounts for less than 10pc of sales. The acquisitions mean that, together with close rival Asos, which now owns the Topshop, Topman, Miss Selfridge and HIIT brands, Boohoo now encompasses Arcadia, the fashion empire assembled by retail tycoon Philip Green.
A tough summer
The company’s commercial success however has long been shadowed by allegations of poor working conditions among its UK suppliers, which came to a head last summer when the Sunday Times investigated low pay and dangerous working conditions in the network of Leicester factories from which the company sources much of its produce. Top ten shareholder Abrdn and several ESG-focused funds divested from the company as its share price plunged by 40pc. Appreciating the existential threat posed by the revelations Boohoo commissioned a supply chain review led by Alison Levitt QC which criticised the company for not having a full list of authorised suppliers, enabling widespread subcontracting to small garment factories that often failed to comply with employment and safety laws. Indeed the review found it was impossible to tell exactly how many suppliers Boohoo actually worked with, estimating a figure of about 500. Levitt did however conclude that the company had not breached the UK’s Modern Slavery Act. Boohoo accepted all of the recommendations and committed to invest more than £10m in supply chain monitoring and compliance measures, appointing Sir Brian Leveson – the former judge who oversaw the inquiries into the phone-hacking scandal and disgraced auditor KPMG – to monitor an overhaul of its supply chain and sourcing practices.
Sir Brian’s first report, published in January, highlighted that production at many of the company’s suppliers had been ramped up during the pandemic at the expense of ‘adequate Covid governance’. A second report was more positive, praising Boohoo’s progress in developing ‘a rigorous process of audit, research and analysis’: a list of 78 approved UK suppliers had been published, and the remaining suppliers were required to bring production in-house ‘to allow for greater oversight and to remove the issue of unapproved subcontracting’. By September the company said that 28 out of 34 improvement actions from the Levitt review had been implemented, with the rest to be completed ‘in the coming months’.
Nevertheless the issue continues to rumble on. The US border agency is investigating claims that Boohoo’s clothes are made in conditions that breach its rules, jeopardising the company’s right to import to the US, its fastest growing market accounting for a quarter of its revenues. And an investor rebellion at its annual meeting in June sought to remove company co-founders, director Carol Kane and chairman Mahmud Kamani, accused of failing to act sooner to address the supply chain issue.
The company’s sales juggernaut has powered on through the turmoil, however, until last month, when Boohoo’s latest set of interims warned that profit margins will fall short of its previous forecast for the year. The second quarter had seen ‘extremely volatile demand’, the rate of sales growth in the UK falling from 50pc in Q1 to 19pc in Q2, and in the US from 43pc to 8pc. Sales in Europe and the rest of the world also fell.
The slowdown was attributed to continuing uncertainty regarding the lingering pandemic, and the logistics bottlenecks that have been particularly acute in the UK. The shortage of lorry drivers – and warehouse operatives – contributed to elevated freight costs, which took a 2.4pc bite – worth £23m out of Q1 revenues, and pushed profit margins down to 8.7pc from 11pc for the same period a year ago. Return rates – which had been lower than normal during lockdowns when Boohoo benefited from a switch to casual wear that is less likely to be returned – returned to more normal levels, touching 29pc. The company forecast that earnings before interest, tax, depreciation and amortisation would be 9 to 9.5pc of sales, down from a previous forecast of 9.5 to 10pc. The retailer’s house broker Jefferies cut its full-year sales growth forecast from 27 from 22pc, and its full-year earnings estimate by 8pc to £196m, lowering its profit forecast for the following year by the same increment, citing the expected ‘spillover of elevated costs’.
In response Boohoo said it was investing heavily in automation to offset logistics issues – part of the £275m capital spend it has committed to new distribution capacity and integration of the brands it has recently acquired. The company pointed out it was 73pc bigger in sales terms than two years ago, and had doubled its share of key markets. The sales outlook for Q2 is better, with students returning to universities, children going back to school, and more people returned to office work and socialising around Thanksgiving, Christmas and New Year resumed. CEO John Lyttle said: ‘Two years ago we were 16-24 only with our younger fashion brands. The new brands we’ve acquired open up our addressable market from about 100m people to 500m.’ It is worth noting that Boohoo’s closest competitor Asos has also become entangled in supply chain issues, its CEO Nick Beighton departing earlier this week in response to results reporting pre-tax profits almost a third below analyst expectations.
As has been exhaustively discussed in recent days the prospects for the UK’s freight industry remain uncertain. The haulage industry across much of Europe is struggling to find enough drivers but Brexit has aggravated the problem in the UK where retailers are struggling to recruit lorry drivers, with pay rises and ‘golden hello’ payments making it increasingly tough for haulier firms and food suppliers to hold on to staff. Such moves seem to be doing little more than circulating the existing workforce, shuffling the same drivers from one sector to another. It remains to be seen what difference the Government’s temporary visa scheme – which aims to grant 5,000 three-month permits to non-UK lorry drivers – will make. The issuance of temporary visas for lorry drivers and food industry workers suggests the Government believes that – contrary to its rhetoric – the logjam may take some time to clear.
The supply disruptions may oblige retailers like Boohoo, which have come to rely on just-in-time production, to adjust their model. Today’s low-inventory systems emerged in the 1980s and 90s, facilitated by new stock control technology and weakening of the labour movement: in the 1970s and early 80s companies needed big inventories to guard against strikes or to fulfil unexpected surges in demand. Just-in-time supply saved infrastructure spend, and allowed greater flexibility, but it exposed retailers to risk, as this year has shown. The current crisis may portend a trend away from finely-tuned logistics and towards old-fashioned acquisition of warehouse space.
Another cloud rolled over Boohoo’s horizon in July when the company was accused of running sham sales and promotions in the US. A $100m lawsuit filed in the Central District of California focuses on a claim that Boohoo offered heavy discounts to US customers based on inflated or ’fake’ original prices that differed from those it had previously asked customers to pay. Boohoo intends to defend the case, but, like last year’s supply chain investigation, it has brought long standing rumblings about the company into the sharp relief. Boohoo has earned past reprimands by the UK’s Advertising Standards Authority for making misleading discount claims and using of ‘countdown clocks’ to pressure customers to buy before a discount times out.
Boohoo’s share price over the past 18 months has served as an index to the company’s commercial and reputational fortunes. It plunged from a high of 413p last June to less than 230p in the aftermath of the supply chain revelations, before recovering to 357p in April as the company showed resolve in dealing with the issue, and continued to register excellent sales. But it has dived to 180p (at the time of writing) following last month’s profit warning. The extent to which the supply chain issues have held down the company’s price can be appreciated by looking at the valuation of Asos, which rose 50pc from the start of the pandemic to May, and that of German fashion portal Zalando, which more than doubled.
If it can gradually move past the supply chain issue, however, and weather the current logistics crisis, the fundamental strength of Boohoo’s business should reassert itself. Perhaps, as a thoughtful Financial Times commentary suggested, the company might benefit from moving to the FTSE: Boohoo’s market value of £4bn is already higher than many companies listed on the main exchange, and a ‘ shift from London’s junior Aim market to a full listing would reinforce the message that the group is serious about growing up.’ For now, however, the company’s owner-managers seem to favour Aim’s looser governance rules.
Given Boohoo’s rollercoaster history, its hard to predict what its future might hold, other than that it seems likely to continue to be an interesting ride. With its recent acquisitions the company has an opportunity to prove it can apply its proven capacity to outsmart its competitors across new areas of the fashion market. That, rather than the supply issue and the current logistics conundrum, would seem to be the true test of Boohoo’s long term potential. At its current low price now might be a good time to buy into a company that, despite the issues that continue to beset it, many of them self inflicted, has persisted in establishing itself as a dominant force in UK fashion.