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Will spending prevent the Boohoo share price from recovering?

The Boohoo mobile app

UK online fashion retailer Boohoo [BOO] warned of slower growth when delivering its fiscal 2021 earnings in May, as the supply chain squeeze, disruption to international deliveries, rising freight costs and an increase in customers returning products weighed on the company and its valuation. The company’s first quarter trading update on 16 June should provide an update on how it plans to tackle these headwinds.

The group reported a revenue jump of 14% from 2020 for the 12 months to the end of February, but it has indicated that revenue for the first half of fiscal 2022 will come in flat. Net sales for Q1 are likely to fall year-on-year due to an estimated 4-6% rise in product returns from pre-pandemic levels. Sales will grow again in Q2, with overall performance expected to be stronger in the second half of the year.

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

All eyes on capital expenditure

Investors will be paying close attention to capex and the EBITDA margin when the Q1 trading update is delivered on Thursday.

Investment in new brands and shipping-related costs to the tune of £60m impacted adjusted EBITDA in 2021, which came in at £125.1m, down 28% from 2020, while pre-tax profit slumped 94% to £7.8m. Capex was £261.5m as the company embarked on a mission to expand and automate its distribution network. A new centre is expected to open in the US in 2024.

Hargreaves Lansdown equity researchers have warned that if there “turns out to be a systematic slowdown in sales, not just a blip, those extra warehouses will become a big problem for profits”.

As costs take a toll, adjusted EBITDA margins are expected to be between 4% and 7% in 2022, down from 6.3% in 2021 and 10% in 2020. Boohoo has said that it will need to raise product prices to try to prevent the margins from eroding further.

“Significant infrastructure spend means the balance sheet isn’t quite as strong as it has been in the past, but there’s still a small amount of net cash on the books. We're watching [capex] closely though. If a company struggles to stick to their capex budget, it can signal problems. If prolonged, it could damage the balance sheet,” noted the Hargreaves Lansdown researchers.

Liberum analyst Wayne Brown has criticised the management’s capex focus. “With margins declining, sales hard to come by and competition as rife as we have ever seen it, layering on debt and doing expensive capex projects seems unfortunate timing,” he wrote in a note seen by the Financial Times.

A bumpy ride ahead

All in all, these headwinds have been putting the Boohoo share price under pressure. It’s slumped 42.8% since the start of the year through the close on 10 June to 70.44p. Having recorded a 52-week high of 337p on 15 June last year, the stock is trading 11.2% above its 52-week low of 63.32p on 7 March and is at its lowest level in nearly six years.

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

Nonetheless, analysts are generally bullish. MarketBeat data shows Boohoo shares have six ‘buy’ ratings, three ‘hold’ and two ‘sell’. The consensus price target is 255.5p, representing a 262.7% upside on the 10 June closing price.

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