What should we do with Boohoo?

The below article was initially posted on my Patreon on October 4th 2021.

This week, I want to focus almost exclusively on portfolio holding Boohoo, which reported half year results during the week. At the time of writing this piece, I hadn't taken a good look at the update, and thus I have yet to form an opinion on the news. So let’s go on an unbiased journey and figure out what to do next with the shares.

The stock is down just under 18% since the results, so it’s clear that the market didn’t appreciate the half year. Given Boohoo is a relatively large position in both of my portfolios, now more than ever I need to reassess whether Boohoo is worth keeping, from an unbiased viewpoint.

Boohoo has been under pressure from various sources for some time. The aftershocks from Boohoo’s forced labour scandal have rippled into court cases in the US and have likely caused a reduction of appetite from ESG investors. Including this week’s drop, Boohoo is now down 40% from ATH’s. However, Boohoo’s customer base has remained loyal, and Boohoo seems to have no trouble selling more garments to its customers each year.

With this in mind, let's unpick the latest results, H1 2022 (reporting period March to August 2021), to see what could be in store going forward.

Starting with the top line, revenue growth in the latest half was 20% versus the prior period. This result is pretty significant given Boohoo’s comparable period in the prior year was in an environment where no-one was able to shop in physical stores, so Boohoo’s ‘online only’ model did well. Now that people are able to return to Primark and TK-Maxx on the high street, the environment is a little more challenging for Boohoo to compete. Unfortunately, included in this revenue growth result will be the in-organic growth from the acquisition of Debenhams and other brands such as Dorothy Perkins, Wallis and Burton. Whilst the breakdown of organic (like-for-like) growth isn’t easily found, Boohoo comments in the half year update that:

[In the UK] The six brands acquired since June 2020 contributed 20 percentage points to the growth on the prior year and 28 percentage points on two years ago.

With the UK contributing £566 million to group revenues (up 32% on the prior year), one could infer that acquired brands contributed £86 million to the UK result and that total revenue for the group without the acquisitions would be £890 million. Thus organic growth totalled 9%. This organic result has therefore been largely driven by continued success in Boohoo’s second largest market — the US. Given Debenhams’ prior scale (online sales were £400 million when Boohoo acquired Debenhams), I am glad to see that not all of Boohoo's growth in the half has been driven by Debenhams, as Boohoo has just relaunched the website in April 2021.

Significant revenue volatility occurred during the half. Boohoo’s first half of the year was split between significant outperformance during the first 3 months and a deceleration in the latter 3 months of the half. For Boohoo’s two key markets, the UK and the US, sales in the 3 months March to May were 50% and 40% up on the prior period, versus the next 3 months June to August, where sales were 19% and 8% respectively.

Next plc online picking volume 2021 — Next plc Half Year Report

For the UK result, it would appear Boohoo’s volatile sales growth is in line with the UK industry, given data (seen above and below) from the half year report of one of the largest and most successful UK clothing retailers, Next plc. Here, you can see sales spiking in March where the average spend for UK customers surged compared to the prior year. A cool off in April/May followed before sales picked up again in the summer. Comparatively, Boohoo looks to have had a better August build up into September trading than Next, possibly due to the more summer festival nature of Boohoo’s garments.

UK spend per customer — Next plc Half Year Report

What about in the US, where Boohoo’s growth cooled significantly from 40% to 8% between the first 3 months to the last 3 months of the first half? Well, comparisons here are a little tricky given the different reporting periods for US companies, but we can see from similar peers in the US that Boohoo certainly isn’t doing badly when (lightly) compared. Online-only fast fashion retailer Revolve, which uses a very similar sales model to Boohoo, has published quarterly results for the period April-June. Sales were up a ‘record’ 60% versus the prior year, which is a faster rate of growth than Boohoo. However, it is important to note that Revolve’s sales growth was negative in 2020. Thus on a two year stack, growth is only up 41% versus 2019. Boohoo’s result for the half year showed growth of 24% in 2020, but 126% growth versus 2019. I think it is fair to say that Boohoo has done much better than Revolve in the US over the two year period.

Revolve Q2 net sales — Revolve Investor Presentation

Lastly, let's take a look at Europe, where Boohoo has a smaller but fairly significant business. Here, sales dropped 15% during the half year. Boohoo gave the following reasons for the fall in sales:

The continuing impact of the pandemic on customer demand in Europe has been very pronounced. It is also probable that disruption at EU entry ports caused by changing COVID-19 testing requirements throughout the period and the subsequent delays to delivery times across the continent have weighed on customer demand.

But how are some other European peers performing over a similar timeframe? Is Boohoo’s reasoning a fair reflection of the market? Boohoo’s London based rival ASOS has a large European online retail business to compare Boohoo’s numbers to. ASOS has recently provided a trading update for the four months to June 30th. Looking at 2019, 2020 and 2021 respectively, ASOS' European business has gone from £269 million to £328 million to £388 million, with growth of 20% seen in the latest period. Another key online peer in Europe Zalando had revenue growth of 40% for the first six months of the year. Again, similarly to ASOS, Zalando had revenue growth in 2020, so the 40% growth in the latest period is impressive. In reflection of these strong results for Europe, it would seem Boohoo has significantly underperformed peers in this region who have largely managed to navigate logistical and demand pressures better than Boohoo. Potentially this could be due to Boohoo’s UK heavy logistics and manufacturing, which makes it less nimble in continental Europe compared to peers with large distribution centres on the continent.

So, in summary of top line results from Boohoo’s key markets:

  • UK — relatively in line with the wider market

  • US — outperforming over a 2 year period

  • Europe — a significant under performance

Next, we need to focus on profitability, which has been significantly impacted in the latest half year report. Boohoo reports profitability from a gross margin, adjusted EBITDA and adjusted profit before tax point of view. Here, it is quite difficult to ascertain the real picture given the adjustments and differences between the various metrics. But we shall give it a go!