Boohoo share price: will increased operating margins fuel the stock's impressive run?

Online clothing retailer Boohoo’s [BOO] share price is up a massive 51% this year. With shares now trading near last year's high, the stock seems unstoppable. With the retailer expecting to increase both revenue and operating margins this year, shareholders could stand to benefit.Boohoo 1-year share price performance, CMC Markets, 14 May 2019

What’s behind Boohoo’s booming share price?

Boohoo’s success is down to its "fashion for all" approach. This ethos means the retailer sells affordable must-have fashion items for all shapes and sizes. Boohoo understands the power of social media. Clothes can be easily purchased on smartphones by a young audience targeted through Instagram.  It also knows that social influencers mean more to its audience than fashion bibles like Vogue.

Boohoo’s reward has been phenomenal 2018 full year results. Revenues surged 48% to £856.9 million last year, while profits before tax gained an impressive 38% to £59.9 million. The company also managed to increase turnover in both the UK and international markets.

Boohoo share price vitals, Yahoo finance, 14 May 2019

CEO John Lyttle commented on the results:

“This has confirmed my belief and optimism that the group’s investments into its brands and infrastructure have allowed it to develop a scalable multi-brand platform that is well-positioned to disrupt, gain market share and capitalise on what is a truly global opportunity."

How have offshoots driven growth?

One of the key growth drivers for Boohoo has been the runaway success of PrettyLittleThing and Nasty Gal.

Last year on-trend PrettyLittleThing took £374 million in full-year revenues, up 107% year–on-year. Gross margin increased to 56.6%, while monthly active users have climbed 70% to 5 million. Last year this on-trend offshoot took £374 million in full-year revenues, up 107% year–on-year. Gross margin increased to 56.6%, while monthly active users have climbed 70% to 5 million.

At this pace, sales from PrettyLittleThing could outstrip the main Boohoo brand. If investors are wary of the fact that Boohoo doesn't own PrettyLittleThing outright, then it’s not showing up in the share price. 

And it’s not just PrettyLittleThing that has seen strong growth. Boohoo's other acquisition Nasty Gal saw sales increase a mammoth 96% to £47.9 million in 2018. Impressive considering Boohoo rescued Nasty Gal from bankruptcy in 2017.

Can Boohoo conquer the US?

Boohoo’s international operations grew 64% to account for 43% of total revenues in 2018. This year CEO John Lyttle has prioritised international expansion as the main growth area. This "global opportunity" will be important if Boohoo is to add to the top and bottom line.

The US will be pivotal in delivering on this vision. US sales across all three brands were up 79% last year, dwarfing the 37% growth seen in the UK. With Boohoo's US market share at less than 1%, there's plenty of opportunity to grow. To get noticed stateside the company has enlisted high profile names such as Jennifer Lopez and US model Ashley Graham, and prominently features US locations in its marketing. 

Lyttle has a big incentive for conquering the US. If he can get the stock to grow 180% in five years, he will receive £50 million in shares on top of his already generous annual pay and bonus.

Can Boohoo increase operating margins?

Boohoo increased gross margin by 54.7% last year (up from 52.8% in 2017), including 56.6% growth from PrettyLittleThing. This massive growth is now filtering through to its operating margin. Currently this stands at 9.9%, but is predicted to hit 10% this year. No small feat in the incredibly competitive retail industry.

Increasing operating margins while maintaining significant sales growth will be compelling news for investors. Especially as Boohoo expects revenues for 2020 to come in 25% to 30% higher this year. If Boohoo can hit its ambitious targets, then this should be seen in the share price.

Yet despite all the superlatives, investors should note that Boohoo shares are trading near the average analyst price target of 249. Hitting this would represent a 2.2% upside on the current price. It is also trading well below the 273.15 high it touched way back in 2017.

The question is whether there is enough momentum for Boohoo to continue its meteoric run, or if analysts have correctly priced in the company’s upcoming plans.