Small Cap Value Report (26 April 2017) - BOO

Wednesday, Apr 26 2017 by
35

Good morning!

Coverage might be a little bit limited today but we'll see how it goes.

First up, I will mention the boohoo results:




Boohoo.Com (LON:BOO)

Share price: 184p (-3%)
No. shares: 1123.3m
Market cap: £2,067m

Final Results

Gross profits are up 42%, growing at a lower rate than the 51% revenue increase:

  • Revenue £294.6 million (2016: £195.4 million)
  • Gross margin 54.6% (2016: 57.8%)

Profit before tax increases to £30.9 million (from £15.7 million).

The contribution from PrettyLittleThing begins from the start of January (until the February year-end).

Outlook:

The outlook comments remain positive:

Trading in the first few weeks of the 2018 financial year has made a promising start and we are excited about the prospects of our development into a multi-branded business. We expect group revenue growth approaching 50%(1) over 2017, which includes growth from the recent acquisitions,  and a group EBITDA margin of approximately 10%."

The main boohoo brand is expected to grow revenue at a rate of 25%, with the rest of the growth coming from the acquisitions of PrettyLittleThing (which is expected to have an organic growth rate of 35%) and Nasty Gal.

So the expected organic growth rate across the group sounds a lot closer to 25% than the 50% total sales growth anticipated.

(work-in-progress)


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Disclaimer:  

All my own views. I am not regulated by the FSA. No advice.

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Boohoo Group PLC, formerly 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
218.4p
Change
 
Mkt Cap (£m)
2,540
P/E (fwd)
41.2
Yield (fwd)
n/a



  Is LON:BOO fundamentally strong or weak? Find out More »


82 Comments on this Article show/hide all

herbie47 27th Apr '17 63 of 82
1

It's about reputation, if they acquire a bad reputation in the US it could well affect their business there, I think a lot of people look at reviews when considering buying from a new company. Bad reps are hard to shake off.

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PhilipHanson 27th Apr '17 64 of 82
3

To be honest the Trustpilot ratings of Boohoo.Com (LON:BOO) are not much better. They have 118k reviews with an average of 6.1 out of 10:

https://uk.trustpilot.com/review/www.boohoo.com

This is over a period of time when Boohoo.Com (LON:BOO) have been astonishingly successful with supernormal revenue growth. In short, I wouldn't be too concerned about customers sounding off on a review website.

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herbie47 27th Apr '17 65 of 82

In reply to post #181629

But ASOS (LON:ASC) only get 3.3 from over 2,600 reviews on Trustpilot.

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Bushranger 27th Apr '17 66 of 82

In reply to post #181557

" I am not at all convinced on the US growth story going to plan, at least not without significant investment in warehousing," Hmmm.. maybe someone should put them in touch with Somero Enterprises Inc (LON:SOM).

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ls2g08 27th Apr '17 67 of 82

In reply to post #181629

I guess if its cheap enough people are willing to deal with poor service? However I think when looking at reviews it is key to look at relative scores compared to other retailers opposed to absolute scores. I think Boohoo's 6.6 trust pilot review is not too bad. I.e. compared to ASOS.

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Ramridge 2nd May '17 68 of 82
2

Re. Boohoo.Com (LON:BOO) US expansion. I read yesterday in the Sunday Times that Amazon in the US is now no. 2 in fashion retail.
If BOO is planning on competing against Amazon in the US, then on current performance they got less than zero chance. And even if they achieve an average level of customer service, then that will still not be good enough. Amazon's customer service and platform are just streets ahead of any competitor.

No long or short position, but if I had a long position, I would be worried.

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Howard Marx 2nd May '17 69 of 82
3

Really no need to worry.

I doubt Boohoo's management think they can compete head to head against Amazon.

Which would explain why they already use Amazon as a platform in both the UK & US.

It would also explain why they have no current plans to build any US logistics infrastructure.

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gus 1065 2nd May '17 70 of 82
5

In reply to post #182028

A decent delivery platform and overall good customer service is a "necessary" but not "sufficient" requirement for success in any market, especially the ultra competitive US.

However, for the teen fashion conscious there's more to it than simply getting the product to the customer promptly. With two teenage daughters, the provenance of the swish new party frock is quite important. "I bought it on Amazon" doesn't quite have the same cachet as "it's the same limited run designer frock as worn by [insert B-list latest cult underground celebrity] on their latest YouTube vid from that boutique Boo". If BOO can piggy back Amazon's logistics there's mileage in it for both of them to cooperate IMO.

Gus.

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Ramridge 2nd May '17 71 of 82

In reply to post #182037

Thanks gus. I have only a passing interest in this stock, so will let others argue the toss.

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Johnmc52 2nd May '17 72 of 82
1

In reply to post #181566

Netflix are running a drama on Sophia Amaruso, the founder of Nasty Gal, called "Girl Boss". There is an excellent review in the Telegraph ( just search the Telegraph site for "Nasty Gal" and it is free for viewing)

Essentially, Amaruso seems to have been more interested in being a feted celebrity rather than a successful businesswoman

Some key points

1 Sales reached $75 million in 2015/2016 when they were supposed to be $300 million
2. Significant employee issues which had resulted in several law suits against the company, and key employees quitting.
3, Growing and tangible customer disaffection
4 Total loss of cost control, poor delivery standards to key retail outlets
5 Liquidity pressure and inability to service debt

Yet the brand was high profile, quirky and in demand

I do think that current stats re service touch more on Nasty Gal than on Boohoo but no doubt what happens over the next 6 months will be defining.

My own view is that Nasty Gal sales could hit $100 million in 2017/2018 with a possible beat on the upside, but the unknown variable is the logistics behind the brand .

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MikeBrenner 2nd May '17 73 of 82
1

In reply to post #182133

Agree johnmc52 ... I think the Netflix series will be some useful free advertising for the brand too. Another key point to consider is part of boohoos strategy is multi brand at global scale ... Nasty gal website already on offer in AU, UK and Euro countries, I can see it already generating content and noise on social media in those markets and CEO on recent investor presentation was very excited at global growth opp for that customer segment.

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bestace 2nd May '17 74 of 82
5

In reply to post #182133

I think you're going to be disappointed with your Nasty Gal expectations for 2017/18.

In the acquisition RNS they said "Nasty Gal delivered net revenue of US$77.1 million in the year ended 1 February 2016. This includes revenue from vintage clothing and third party brands, which are excluded from the proposed transaction".

So you can't just take the $77m and add a bit for growth. The $300m figure was just a journalists's wildly inaccurate guess and should be ignored.

In their presentation last week, the company mentioned expectations of £15-20m for Nasty Gal for this year and revenue growth for the group as a whole of 50%. There may well be some outperformance against that baseline but to expect $100m for Nasty Gal alone is... optimistic.

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WhaleHQ 21st May '17 75 of 82
1

In reply to post #181575

I'm glad they didn't acquire the warehouses etc The beauty of the transaction is found in boohoo's ability to put a discrete facade on one of the quickest test and repeat models around. They also have greatly enhanced the permeability of their email advertising for all brands by acquiring Nasty Gal's heavily US saturated database.

I see very little risk in this acquisition and hope that similar opportunities arise in the future, I can't envision a better way for them to crack male fashion for example.

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Housemartin2 22nd May '17 76 of 82

In reply to post #187418

Yeh, well my suggestion about acquiring the warehouse & logistics of Nasty Gal was a rather throw away line - given what I have read about NG, I doubt it was anything but a shambles - but my main point was how you deliver on the 'fast' bit of fast fashion when sourcing from a warehouse across the Atlantic.

I know nothing about international logistics but it does seem to me that its like doubling the width of the US. Perhaps I am in danger of thinking in terms of a small island where next day delivery is not unusual. Perhaps the expectations in the US are, given the geography, different.

Would be interested in views on this

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Steve Hill 22nd May '17 77 of 82

In reply to post #187490

I assume that management have thought this through & come up with the best solution.
Boohoo is not short of cash & therefore if having a warehouse in the US was the best solution then thats what they would have done.
Until management make a mistake, I think we should trust their decisions.

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Housemartin2 22nd May '17 78 of 82

In reply to post #187508

Reasonable point Steve but my background concern is that the US has been the graveyard of UK retailers - albeit in different formats to BooHoo - by misunderstanding the environment. I am not aware that BooHoo have any knowledge in depth of the US market

A retort may be that they have done pretty well there so far, so they must be getting something right. Lets see as they scale up.

I don't want to overemphasise this. I think this is a star of a company run by pretty cute individuals but I would like some comfort on this point.(My concerns are personally ameliorated by BooHoo being a 5+ bagger for me so I have a fair value hinterland to cover any dips)

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Steve Hill 22nd May '17 79 of 82

In reply to post #187526

Completely agree, it's nice to be holding a company where we are concerned about possible, future, maybe, potential problems, rather than one like RBG that has actual problems now - much prefer the virtual type ; )

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WhaleHQ 22nd May '17 80 of 82
2

In reply to post #187526

I did a little bit of research earlier and found the following estimated delivery times in the US:

Boohoo – 6 days (standard) 8-10 days Supersaver
Charlotterusse – 5-10
Forever21 – 3-5 days standard
H&M – 3-5 days
Lulus – 7-10 + 2-3 dispatch

It is worth noting that there are next day delivery option also but they cost a fair bit more.
My take from this was that customers do in fact have a lower expectation of delivery times as you speculate but I do know amazon amongst others are at the very cutting edge of minimising delivery times so expectations will most certainly change.

It’s far from clear cut but I think that management have made the right decision keeping everything under their noses as they expand into the US but like you I can see a real need for significant warehouse expansion both locally and abroad in the near future.

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Housemartin2 22nd May '17 81 of 82

In reply to post #187537

Steve - oh yes. I was in RBG until mid March, when my concerns about whether rolling out posh bars was a wise place to be given the coming squeeze on consumer spending (consumers still going out but trading down etc). (Like to flatter myself but really more luck - for once )

BOO is a whole different ball game

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Housemartin2 22nd May '17 82 of 82

In reply to post #187577

Jamaker - thanks for this. V interesting.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »

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