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Boohoo’s share price dips despite 39% revenue jump. What’s worrying investors?

Compared to the rest of the beleaguered retail sector, and even against its peers in the booming fashion e-commerce market, Boohoo Group’s [BOO] top-line growth over the last quarter was nothing short of phenomenal. 

In its 12 June trading update, the company said that revenues for the three months to 31 May had increased 39% year-on-year to £254.3m, driven by jumps of 72% in continental Europe and 64% in the US. Net cash also increased 28% to £194m, bringing the Boohoo share price one step closer to eventually supporting a dividend payout.

But in the wake of this great news, the company’s share price spiralled. After some wild swings throughout results day, it closed the week at 221p, down 4% from before results and almost 10% from April’s year-to-date high. What’s spooking investors?Boohoo 1-year share price performance, CMC Markets, 18 June 2019

 

Converging margins

While Boohoo’s revenues were up, the results also showed that the company’s overall gross margin was down almost 0.4% year-on-year, at 55%. And not all of the brands under the Boohoo umbrella are pulling their weight. 

Across the company’s five brands – Boohoo, BoohooMAN, MissPap, PrettyLittleThing and Nasty Gal – margin performance was mixed. Gross margins within PrettyLittleThing and Nasty Gal each fell some 4.7% from the previous year, while the eponymous Boohoo.com brand rose over 4%.

Slimming margins within the high-octane growth segments – for example PrettyLittleThing, the group’s second best-selling brand, which saw revenues jump 42% year-on-year – may well be a concern for shareholders, worried they are thinning faster than the company can compensate for.

 

Market cap£2.56bn
PE ratio (TTM)68.88
EPS (TTM)3.20
Quarterly revenue growth (YoY)45.70%

Boohoo share price vitals, Yahoo finance, 18 June 2019

 

Analysts, however, say that the company’s wider performance should offset such concerns. “Given the strong sales performance across all the brands, it would be very harsh for the modest 'miss' to consensus for PrettyLittleThing to weigh on the shares,” City broker Liberum said.

 

Marketing costs on the up

As a growth company in an extremely competitive sector – with Amazon lurking in its shadows – Boohoo is unlikely to prioritise pay-outs over reinvestments anytime soon. Any injections of cash will likely go towards the newly acquired MissPap, which was purchased for an undisclosed amount in March. “MissPap has been in decline, as it’s been lacking investment,” chief financial officer Neil Catto said. “We’re encouraged by what we’re seeing, but it’s only [been] four weeks [since the acquisition].”

“We’re encouraged by what we’re seeing, but it’s only [been] four weeks [since the acquisition].” - Chief financial officer Neil Catto on the MissPap acquisition

Marketing costs also continue to weigh on the company, due to Boohoo’s heavy reliance on social media advertising – a channel which is becoming increasingly expensive to utilise. Catto said that marketing will absorb over 9% of revenues at group level for the full year and admitted that costs at “the newer brands [NastyGal and MissPap] … are still at a higher level than the more established brands, Boohoo and PLT [PrettyLittleThing]”.

 

Still a buy?

Shares at Boohoo do indeed look expensive at present, with a P/E ratio of 68.88, compared to an industry average of 34.75 and a sector average of 19.34, suggesting that this recent dip in share price could perhaps be the first stage of a longer-term correction in share price.

68.88

Boohoo shares' P/E ratio

Analysts, however, have not lost confidence. According to Reuters, six out of 15 analysts are currently recommending Boohoo as a ‘strong buy’. Meanwhile, Peel Hunt, Jefferies and HSBC are among the brokers who have upped their stance on the stock since Wednesday. With HSBC’s current target of 290p representing a potential upside of more than 30% on Monday’s closing share price of 222.70p, Boohoo remains a shooting star among retail stocks.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material 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 prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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