Boohoo (BOO): Short report -- initial thoughts

Always useful to study ‘short reports’ on shares. Shorters tend to be more forensic with their analysis and us ordinary investors can often pick up tips that can help our company evaluations.

Shadowfall has published this report on Boohoo (BOO):

(you can enter a false email and then press download for access)

BOO has responded with this statement:

The report interests me because I wrote about BOO for SharePad in February:

Did I miss anything? Let’s find out.

Main issue seems to be BOO’s definition of free cash flow.

BOO owns 66% of PrettyLittleThing (PLT) and while reported earnings exclude the 34% minority interest in PLT, the cash flow statement includes all cash produced by PLT.

Shadowfall states:

*Since 2014, we calculate that BOO has provided a misleading impression of its cumulative Free Cash Flow (FCF) by 67%. We believe that this repetitive misrepresentation has been produced by the company since:

1. BOO includes in its FCF all cash generated by PrettyLittleThing (PLT) as though it were 100% wholly owned. However, by 2022, we calculate that BOO could be due to pay dividends of at least £77m to PLT’s 34% Non-Controlling Interest (NCI), aka the son of BOO’s Chairman. On this basis, we believe that BOO’s inclusion of PLT’s cash generation as though it were 100% wholly owned, makes a mockery of BOO’s reported FCF. Further, we’re unconvinced that the market realises this large cash dividend disbursement is likely. We believe this highlights the importance of adjusting for minorities in the FCF calculation and that investors should instead focus on a Free Cash Flow to Equity Holders metric (FCFE).

2. In FY20, BOO even began paying out some of this cash to PLT’s NCI and yet still excluded this payout from its reported FCF. If BOO had deducted this dividend payment from its 1H20 reported FCF, then this alone would have reduced reported 1H20 FCF by 11.3%.

3. BOO doesn’t appear to include any tax payment within its FCF, even though its own auditor guides that this should be included. Maybe BOO sees tax as a discretionary payment?”

BOO has responded:

Definition of Free cash flow

Free cash flow is disclosed within page 9 of the Group’s most recent annual results published on 22 April 2020, and contains clear definitions, alongside a full reconciliation down to net cash flow for the financial year, including items such as tax paid and dividends paid to minority shareholders.

International accounting standards require the Group to fully consolidate its cash flows, and its treatment of this with respect to its subsidiary, PrettyLittleThing (“PLT”) reflects this conformance with accounting standards.”

I am with BOO on this. There is no real standard for calculating free cash flow and investors ought to make up their own minds as to how the figure should be calculated for different companies. Minority interests are fully consolidated on cash flow statements, and investors just have to use the earnings minority interest (and/or any minority dividend) as a guide for judging the cash flow minority interest.

Cash flow analysis really should be applied to double-check whether earnings are actually valid rather than be used as a pure valuation measure. For instance, including tax with FCF can distort valuations simply due to tax payment timing issues — the whole point of the accrual concept of earnings is to mitigate such issues.

That said, I did compare BOO’s earnings to FCF in my SharePad article. I used the post-tax earnings before the PLT minority, so my comparison was on a like-for like basis (phew!). I did highlight the £10m PLT minority and double-checked PLT did make c£30m at Companies House.

The other issue is the ‘earn out’ liability for BOO to acquire the 34% PLT minority.

Shadowfall states:

“BOO announced its acquisition of 66% of PrettyLittleThing (PLT), in December 2016. The remaining 34% NCI was deemed to be used “to incentivise CEO Umar Kamani and PrettyLittleThing’s senior management”. BOO has an option to acquire the NCI (34%) in PLT at a “market value” by early 2022.”

**Exactly how BOO will arrive at the valuation determinants for a “market value” is, in our view, somewhat unclear. In its original announcement BOO merely states that it would be determined by a “Big Four accounting firm”. If PLT were acquired at the average market multiples as BOO and its peers trade at today, then this cost to buy-out the NCI could be almost £1 billion. Maybe this is why BOO continues to build up so much cash and not distribute it to its shareholders?”

BOO has responded:

“PLT option

As disclosed at the time of the acquisition of the majority of PLT, and in the latest annual report and accounts, the Group has the option to acquire the remaining 34% minority shareholding in PLT, with the terms of the option coming into being on 28 February 2022. Under the terms of the agreement, it was agreed that an independent big-four accountancy firm would undertake a valuation exercise to determine the market value for PLT, after which a minority discount may be applied of up to 30%.”

So everything is a bit vague. Note that BOO has an option to acquire 34% of PLT — there appears to be no obligation to purchase the 34%. Perhaps that is why BOO carries no associated PLT earn-out liability on the balance sheet.

BOO uses a share-based payment calculation to apply a charge for the PLT option:

A total option fair value of £207k seems rather ludicrous, but that is IFRS 2 accounting for you.

Not sure this PLT earn-out is really an issue for shareholders. The option can be satisfied in BOO shares and, going on the 2019 numbers (and assuming PLT is valued as per BOO), an extra c25% of shares can be issued in exchange for an extra c25% of earnings.

From what I can tell from this preliminary study, I don’t feel the Shadowfall report has unearthed major bookkeeping problems at BOO. The general arguments seem to be based on City analysts not interpreting the accounts correctly (or relying on the company’s own measures), and not including possible PLT earn-out/dividend obligations in their valuation sums.


Hi Maynard,

I hold BOO and so was interested to take a look at the Shadowfall report. I also seemed to recall Tom Winnifrith making rumblings a while back on BOO’s accounts, though it came to naught.

As you note the points raised seem to relate to free cash flow rather than the fundamental profitability of the business (which would have been more of a concern). I concluded that whilst BOO could probably have done better in its reporting of FCF and transparency in general, there was no smoking gun. This was not a Muddy Waters vs Burford, in my view.

My feeling is that BOO’s market value is determined more by the combination of turnover growth and margin. It is not a company running low on cash (particularly post the recent raise).

Is BOO worth £4bn, or almost 5x sales? (PE north of 60) who knows! The valuation remains eye-watering. However, for a consistently profitable high growth digital business which appears to be weathering the COVID 19 crisis, maybe its not so outrageous.

I hope I’m not proven wrong, but if I am, sooner would be preferable to later - please let me know what I have misunderstood.


Hi Roger,

I think you have understood the situation correctly – or at least as I understand things having skimmed the Shadowfall report! I feel the report boils down to FCF presentation, and while BOO could improve how it defines FCF, the accounting figures are all there for investors to produce their own sums and ratios. For minorities, cash flow statements include only minority dividends and investors have to estimate ‘minority FCF’ and ‘rest of the group FCF’ for themselves.

Agreed, the longer-term share price direction should be dictated by sales growth and margin – and how such progress compares to the expectations of the current (high) valuation. So famous last words – not a BUR or NMC situation.


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Good Morning,

It’s interesting to see that the Boohoo owners have acted very quickly to complete the acquisition of the remaining 34% of PLT,paid via stock issue. Credit to them for clearing the issue away so decisively, it renders Shadowfall’s concerns moot.