Boohoo’s [BOO] share price fell 1.9% on 7 August after it confirmed the acquisitions of mid-market British brands Karen Millen and Coast for £18.2m combined.
The deal, which is a pre-pack administration that includes the online business and intellectual property of each brand, comes at a time when both retailers are struggling to compete with the slowdown on the high street as more and more customers shop online.
“The retail trading environment in the UK remains extremely challenging… Whilst a sale of the whole business has not been deliverable, the Boohoo transaction facilitates the survival of these iconic British brands through an online platform,” Rob Harding, a partner at Deloitte (the firm handling Karen Millen’s administration), told the Financial Times.
For Boohoo, buying the two distressed brands out of administration from Icelandic bank Kaupthing is part of an ongoing expansion strategy that would see it become a multi-brand fashion powerhouse.
Not a good match?
While the deal would allow Boohoo to diversify away from teen fashion, analysts have mixed opinions.
Indeed, the contrast between Karen Millen’ s and Coast’s relatively high-priced apparel and occasion wear to Boohoo’s under £10 crop-tops and £4 jersey skirts is stark.
GlobalData’s Emily Salter went as far to say the acquisition “risks devaluing Coast and Karen Millen as their success stems from high-quality product and sophisticated designs”, adding that it would be hard to build up growth momentum in the two established brands.
However, retail analysts at Jefferies disagreed, saying that the deal was a good one for Boohoo investors.
“Karen Millen and Coast are both strong UK brands, in our view, with distinctive premium ranges, including work wear and occasion wear, that would complement the existing group brands,” they said. “We would expect Boohoo to keep the creative teams and brand marketing completely separate but seek to leverage its efficient sourcing, distribution and IT infrastructure to grow the business globally and make it more profitable.”
“[The acquisition] risks devaluing Coast and Karen Millen as their success stems from high-quality product and sophisticated designs” - GlobalData’s Emily Salter
Retailer defies wider market blues
The online fashion retailer is seeing rapid growth amid the struggling retail landscape, with shares up 46% year-to-date and sales up 39% year-over-year at £254.3m in its most recent quarter.
In comparison, Karen Millen’s and Coast’s combined online sales totalled £28.4m in the year to February 2019.
Boohoo’s effective social media marketing strategy and tie-ups with celebrities has helped it grow to around 13 million active customer accounts across its existing brands, which include Nasty Gal, PrettyLittleThing and as of March, MissPap.
|PE ratio (TTM)||74.53|
|Operating margin (TTM)||7.63%|
Boohoo share price vitals, Yahoo finance, 08 August 2019
Both its (TTM) return on investment of 20.09 and return on assets of 12.38 more than outpace the sector’s averages of 10.67 and 6.68 respectively, indicating a healthy investment for traders.
The company’s ability to turnaround its business from a stock decline of nearly 15% in 2018 signals that under its ownership, brands such as Karen Millen and Coast could be revived after benefiting from the group’s delivery infrastructure, lowered distribution costs and increased service ability.
It’s also worth noting that Boohoo’s strategy to expand outside of the UK has been a core part of its business, especially given that its international group revenues rose 56% in the three months to 31 May, making Karen Millen’s more global business appealing, with 50.2% of its sales come from outside its domestic market.
“The acquisition of the online business of two great and renowned British brands in Karen Millen and Coast represents another milestone in the group's growth story as it continues to invest in its scalable multi-brand platform and gain further share in the global fashion ecommerce market,” Boohoo CEO John Lyttle said on the acquisition.
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.