Cry-i-i-i-iiing over boo

Wednesday, Jun 13 2018 by
9

I know that Boohoo.Com (LON:BOO) is a favourite of many on here and expected there to be a bit more chat on it after Q1 2019 update which I was looking forward to for my own enlightenment.

I sold my Boohoo.Com (LON:BOO) shares on this announcement at 216p. I'd bought in for the first time late 2017 between 170p & 180p. A measly 20% ish gain. No boo multi-bagging glory for me. A really impressive business and I was very late to it compared to many buying in the 50x forward PE area whereas other got in lower price and lower PE.

This is not my usual buy territory as I like a bit more value and/or contrariness to buy candidates (I do like some growth and willing to pay up a bit but I'm defo slightly to the cheap and miserly side). Just the way I'm wired. I can irritate myself sometimes with a lack of willingness to pay too much for growth. Boo had pulled back on some worries after a stellar FY2017 and I felt an opp to get into a stellar grower at a high but not too high price.

FY 2018 performance was very impressive particularly top line growth at 97%. Conversion to profits less impressive at 29% net profit and 26% eps. This is where the trouble starts for me...

I was willing to overlook last year's lack of follow through to profits with new acquisitions, the cost of rapid growth and infrastructure build out. However, Pretty Little Thing acquisition had irritated me a little as 1/3rd of value stays with founders (siblings of boo founder). Obvs PLT has made stellar first year contribution and spectacular Q1 2019, BUT...

The main brand stagnated a bit by comparison in FY 2018 relative to PLT but not absolute terms where it was still smoking relative to competition so that was okay overall. However, the Q1 boo brand result is a flop. IMO there is a lot to understand about this flop relative to PLT and we don't really at the moment.

Boohoo man was pushed at end of financial year as standalone brand but they have not split it out in Q1. That seems a bit odd to me. Either boohoo man has disappointed or it has done well with its very visible marketing push but boohoo-non-man hasn't? TBH boohoo man probably doesn't have much impact but the point is they promo'd it like they did PLT and Nasty Girl but they haven't followed through on their hype in reporting. I feel that if things had gone well it would get a nice headlines so sniffs of something not quite right.

PLT is just another version of boohoo using the same platform and processes with rather superficial brand based differences. Now I get that one brand can be hotter than the other but the differential is too much. In the space of little over a year PLT has nearly closed in on the revenue of boo in Q1 2019 (£79.2m vs 97.2m). Another quarter of sales growth anything like what we have seen and it surpasses boohoo comfortably.

The differential in growth rate must be largely driven by management choices. In which case why are management choosing PLT over boohoo? We shareholders don't get the full benefit of PLT and the better PLT does the more the plc will need to pay to the PLT founders (siblings of boohoo founder).

Okay...you may say why worry so much about as the overall is doing pretty great...well, I could go with this pragmatic perspective (I'm not against entrepreneurial founders getting rich at all!) IF boohoo brand had put in a better performance. Up 12% YoY on quarter is poor. It screams flatline on growth for boohoo brand. But as PLT has growth so much it seems the flatline is driven by where management has decided to deploy resources rather than there being a real current ceiling to boohoo brand (plus perhaps a misfire on boohoo man). That's troubling as it suggests that the group has reached a limit in terms of what the broad (not just warehouse) infrastructure and management ability can cope with. And the discussion re focusing on margin rather than sales volume for boohoo brand heightens the suspicion for me....why isn't it a bit more of both and given the stellar PLT why not hang the margin and go for volume on boohoo brand? There's just no way they wouldn't be going for more revenue growth on boohoo brand if they could. There's something going on there.

All might go well. The boohoo management have been super impressive and have built a great business. But a bit of a slip or disappointment from here will take shares down really hard. Given performance over last 15 mths or so (in profit terms) its hard for me to understand why boohoo should get above a still very high 30x forward PE. It may come out with rocking performance for the rest of the year and earn its high multiple but that looks like a low prob event.

Of likely price scenarios the positive is that it maintains investor confidence and trundles around current level +/-20% and the negative is that a bit of fear gets in with or without the aid of events and takes the price down to low 100s. I could be buyer on either outcome in future as it looks a good business with management that know what they are doing from execution perspective. My hunch is that investors seeing the retail environment as continuing to be tough is good for 'idiosyncratic growth' boo but a confidence rebound in general would see its multiple deflate at expense of some more mundane stuff inflating. I don't know what happens with retail confidence but from upside-downside risk perspective I favour backing those that benefit from rebound over those that benefit from continuation of tough environment.

Management say they are on course to be £3bn revenue business on 10% EBITDA margin with 25%pa sales growth. Let's be generous and say that's 20x EBITDA margin so £6bn business. That leaves a good bit of upside from here (130%)...but its just too early to earn much of that upside as there is a lot of the path to £3bn to be built.

Note, 25% sales growth is a very good clip so could add more to valuation but I don't want to get too bluesky plus the end point articulated by management is rather odd as the dynamics are really that of a pretty high growth company at that point and they are really saying they are just getting started in terms of growth potential which just doesn't stack up really. In addition, there is no way that boo is a takeover candidate in future for anyone (other than Amazon who would have a place to fit it...and why would boo be on their list at premium valuation? Will only make their purchase list if they get it on low multiple after a growth disappointment (due to infrastructure strain?)

Those are my thoughts. What are yours?

Best wishes
Paul


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boohoo.com plc is an online fashion retail group. The Company is based in the United Kingdom and has a strong presence in the United Kingdom, the United States, Europe and Australia, selling products to almost every country in the world. The Company owns the boohoo, boohooMAN, PrettyLittleThing and Nasty Gal brands. These brands design, source, market and sell clothing, shoes, accessories and beauty products targeted at 16-30 year old consumers in the United Kingdom and internationally. more »

LSE Price
201.1p
Change
-2.3%
Mkt Cap (£m)
2,366
P/E (fwd)
49.6
Yield (fwd)
n/a



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13 Posts on this Thread show/hide all

JohnEustace 13th Jun 1 of 13
1

I can’t see Amazon wanting to acquire them with their Leicester supply chain, at least not if their due diligence extended to reading the recent FT investigation into the textile industry there.

https://www.ft.com/content/e427327e-5892-11e8-b8b2-d6ceb45fa9d0

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lavinit 13th Jun 2 of 13

In reply to post #373614

It was blue sky sort of thought to support a blue sky valuation

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Damian Cannon 13th Jun 3 of 13

Thanks for outlining your thoughts Paul. They are pretty much in line with my own feelings about the update - especially around PLT. The business seem to be pushing this brand hard, which is great, but they're either neglecting the core boohoo brand or growth there has permanently stalled.

I still believe that this is a great business, which will prosper and grow, but it's hard to square the high P/E with a group that isn't firing on all fronts. As a result I'm not about to sell out of Boohoo.Com (LON:BOO) but neither am I inclined to top-up until they come out with an above-expectations announcement.

Blog: Ambling Randomly
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Laughton 13th Jun 4 of 13

No, I can't see Amazon buying either. Maybe another clothing retailer who thinks they have the necessary flair but Boohoo.Com (LON:BOO), to me, depends to a great extent on the people at the top. There's a lot of artistic input in the design side, lots of style changes going on almost daily to keep everything very fresh and a lot of social media and tie ins with celebrities/influencers to generate/maintain interest from their customers.

Amazon, by contrast sells a massive range of stuff that other people design/manufacture. There's nothing there that's original, it's just a huge marketplace where you can get anything you want at a rock bottom price delivered to your door the next day with virtually no hassle.

To buy somthing like Boohoo.Com (LON:BOO) they'd have to take on the people at the top and, even forgetting that those people would sudeenly become very cash rich, I can't see them being interested in working for someone else with all the oversight that would entail. They'd much more likely want to go off and start up again, work for themselves and prove that they can do it again their way.

The huge outperformace of PLT vs BOO is a bit of a worry though. I guess it's human nature that, given the choice/chance, management are going to push the side where they personally own 1/3rd of the profit harder than the other side where they have a much smaller shareholding. As Paul intimates, there's not really that much difference in the product - it's how it's marketed that makes a difference.

This has been a huge winner for me - I first got in near the beginning on Paul Scott's SCVR early write up and haven't sold any but I think I've persuaded myself that I should cut back a bit to a more normal sized holding.

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Banzii 13th Jun 5 of 13

In reply to post #373649

In the past couple of years amazon have moved into own brand products including clothing.
https://www.recode.net/2018/4/7/17208804/amazon-private-label-brands-list

I think it's mainly in the US for now but who's to say it will stay that way.

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0ctag0n 13th Jun 6 of 13
2

CFO has just sold 1.5m
"Neil Catto has exercised an option over 1,553,398 Ordinary Shares at an exercise price of 25.75 pence per Ordinary Share, and has sold these shares at a price of 215.093p per Ordinary Share"
https://investegate.co.uk/boohoo-com-plc/rns/director-s-dealing/201806131312152966R/

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lavinit 13th Jun 7 of 13

In reply to post #373649

My comment that Amazon may one day think to acquire Boohoo.Com (LON:BOO) has perhaps distracted. My point was really that boo looks a very hard acquisition for anyone particularly at this sort of valuation and with all the investment required to get it to £3bn annual sales with a 25% annual sales growth rate. Who could find synergies with such a global online business and afford the price tag -> Amazon.

It's a blue sky thought rather than a prediction and my underlying implicit point is that boo is going to have to get itself there on its own without help...which means shareholders have got to believe they are getting paid back in company cash flows

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Damian Cannon 13th Jun 8 of 13

In reply to post #373674

Yes it's not much of a vote of confidence to exercise and immediately sell all 1.5m shares! His actual holding of shares (rather than additional options) is minuscule. Still nice work if you can get it.

Blog: Ambling Randomly
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gus 1065 13th Jun 9 of 13
2

In reply to post #373709

Similar thing happened last September when joint CEO Carol Kane sold 4.65m shares just after a results announcement that triggered/was contiguous with quite a sharp sell off in the shares (then priced north of 250p and fell below 200p after her sale at 230p). Can’t blame them for cashing in (as a prudent investor doesn’t really make sense to have all of your assets invested in your employer’s equity (just ask former Lehmann Brother’s staff!)) but as you say doesn’t really demonstrate a vote of confidence in the future prospects of the business.

https://www.stockopedia.com/share-prices/boohoocom-LON:BOO/news/boohoocom-plc-directoraposs-dealing-urn:newsml:reuters.com:20170928:nRSb0308Sa/

Gus.

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jonesj 13th Jun 10 of 13

I've also just sold out of Boohoo after approximately a 20% gain, although this is my second time around & first time, the sale price was approx 9.5x the purchase price.

I just think the high PE ratio needs to have very strong growth to support it. Whilst the overall growth is good, growth at the core BooHoo brand seems to be slowing rapidly. So one has to question if this is a blip, or a flattening out that will spread to their other brands within 1~2 years. I have difficulty answering that, so sold.

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slc72 13th Jun 11 of 13

I sold out today, made a small profit on the rise up over last month, will probably go back in if I see a good trading range appearing. But it isn't something I feel safe just holding long term for now. Maybe if I manage to get some at a good discount and I get lucky I might become more of a long term holder.

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extrader 14th Jun 12 of 13
1

In reply to post #373709

Hi Damian

If you go to the A/R, you'll see Catto's salary is GBP 217.5K.

The shares he's sold relate AIUI to a 2015 ESOP, they vested as follows

Shares : 1,553,398 price 25.75 Vesting period 22/05/15 to 22/05/18.

They were earned on basis of earnings targets over the 3 years. He probably couldn't exercise post 22/5/2018 because of a closed period.

I have no problem with the CFO, one of 3 ED's, making money on a share that has 8-bagged for me...

I would like to see Mahmoud and Carol spending more energy on the core BooHoo line , though...

ATB

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andrea34l 14th Jun 13 of 13

I sold out too on the trading update. On this valuation they cannot afford for anything to go wrong but, for whatever reasons, the original boohoo brand has seen a distinct slowdown.

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