Boohoo (BOO): Target £10+

Laura Ashley was odd in that they pitched themselves as a high end brand but relocated into cheap out of town units. Hardly a befitting location for premium brand, among Caroline warehouse and Nando’s.

Of course, no advice and DYOR are clearly understood. :smiley:

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It strikes me that we need a fashion conscious teenager or mum to give us a clue on the saleability of Boohoo clothes. It’s like taking a punt on miners or oil drillers when you are not a geologist

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I really like the way Andrew Hollingworth thinks and I really like his insights on Boohoo…

Note: This is one of his rare full free research papers - but you might have to sign-up to access it…

hi Colin

You may also be interested in this PI World interview with Andrew Hollingworth in July this year.

He talks about Boohoo at 23m19s.

Regards

Snazzy

A polite reminder about the aim of this forum:

A few tips:

Posting links: Do try to outline why the article/video is worth reading in full and what your opinion is. If you make the effort first, somebody else is more likely to chip in with further insight and the collective knowledge of this forum can then increase.

(If you link to a dated article/video, do say so. That way confusion is minimised).

Reading links: Always helps if you read the article/watch the video first before replying.

Expressing thanks: Please use the direct message facility to send a thank-you. Or just hit the like button at the bottom of their post:
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Otherwise the more insightful contributions may be overwhelmed with one-liners that not everyone needs to read.

I have removed/amended various posts so the focus remains on Boohoo.

Thanks
Maynard

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Ok, so let’s click those links and see what Andrew Hollingworth (AH) has to say about BOO.

First off, the PDF is dated September 2020 and the shares were then 320p.

AH summarises the case:

Boohoo we think has cherry picked and executed upon some of the best retail business models out there and married these traits with some great technological, logistical and social trends/brands of today. It has that unusual combination of owner-manager, very high organic growth, extremely high returns on capital and best of all: its model looks very scalable.

But AH also says:

This note is really intended as a marker.

Because at the time he was not convinced about the upside possibilities:

We look for mis-priced compounders or wonderful businesses that might not be priced as such (GARP if you like). For all of our admiration of Boohoo the margin of safety in paying today’s price is far from clear.

This is quite prescient from AH:

"Current trends and investing markets do not seem to suggest any other way of investing in such a business than paying up for the shares today, but we have learnt that the investing world is a funny place. Once loved brands such as Chipotle or Greggs can fall 50% and then treble. Next plc the stable, best in class incumbent in this sector still sees it shares fall c.30% every 5 years. Maybe an opportunity will arise. In maverick run businesses’ in the UK they have a habit of doing so. "

AH’s approach here is commendable. Identify what you think is a very good business, then do the homework, and then hope for a buying opportunity at which point you should have already developed the full conviction to buy.

Onto the video, published July 2021 when the price was 261p. AH confirms he has been buying BOO. A summary:

  • Investors generally are asking cynical questions of BOO and Asos, rather than just admiring them for becoming global players in fast fashion.

  • BOO is being held to account over ESG issues, while a Chinese competitor is not. Investors can’t complain about ESG issues and also complain about non-ESG rivals growing faster.

  • We really like owner managers, even if they have foibles and are not perfect.

I get why AH likes owner managers. But there’s never any harm in asking cynical questions, because that way you can help determine whether your investment theory is robust or flakey.

Complaining about other investors complaining about ESG issues I think misses the point. The bigger worry is BOO suffering greater expenses from abiding to ESG standards, while losing market share because a non-ESG rival can price products more competitively.

AH refers to other companies in that report to justify his BOO:

The best businesses that we study use scale cleverly to drive efficiencies (Ryanair, Wetherspoons are well-worn examples)

But BOO’s last trading statement said

This is as a consequence of significantly higher returns rates impacting net sales growth and costs

The difference perhaps is Ryanair and Wetherspoons do not have returns. Once you have taken the flight or drink, that is it – no refunds. BOO meanwhile has to service refunds from customers ordering numerous items and returning those that don’t fit. The economics may not be exactly the same.

A BOO number to monitor perhaps is accruals within Trade and Other Payables, which will include refunds owed to customers:

AH also admits:

We are well outside our circle of competence in assessing the subjective and fickle world of 16-24 year-old fashion trends, but we will say with some confidence that any pivot by Boohoo to in time add menswear brands (beyond its in-house BoohooMan), will surely be easier than the other way round. Ladies young fashion is surely the hardest market to crack.

So a lot of trust is being given to management here and presumably its ambition of reaching a 10% adjusted EBITDA margin. Fair enough, but I would be asking the cynical questions on this just in case.

I would have saved myself £££ on my Tasty shares had I asked cynical questions about its margins. The Kaye family had produced restaurant multi-baggers with ASK Central in the 90s and Prezzo in the 00s and Tasty was set to be their hat-trick in the 10s. But minimum-wage rises alongside growing competition that kept a lid on menu prices squeezed margins before the inevitable roll-out stopped.

I had a meeting with Tasty co-chief execs Sam Kaye and Jonny Plant during 2017 and I asked about margins and staff numbers, and they said margins would return to 10% and a comparison with Prezzo was not like-for-like due to how part-time staff were accounted for. In retrospect Tasty’s numbers were showing the economics of restaurants had weakened and management – despite the super track record – could not do much about it.

Back to AH. His November factsheet
VT-Holland-Advisors-Equity-Fund-Factsheet-2021-11.pdf (284.6 KB) shows a 3.5% position for BOO. Will be interesting to see if his next factsheet shows him buying after the December warning and the shares being 50% lower since his July video.

Maynard

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Hey Maynard,

Excellent summary, and I especially appreciate your additional insights - I agree 100% with your point here:

“Complaining about other investors complaining about ESG issues I think misses the point.”

Also, I think your point about monitoring accruals makes a lot of sense, although I believe a better way to track this would be to try to compare Net Sales against Gross Sales - but based on a quick look at some recent reports, it doesn’t seem to be so easy to find this information.

Also wanted to add that now, I feel guilty about not providing a similar summary myself, however, you have done (as usual) a far better job than I ever could, so there’s at least that :slight_smile:

Regards Colin.

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Hi Colin,

Yes, not easy. The FY 2021 results did state Average Order Value was:

(4) Calculated as gross sales including sales tax divided by the number of orders

So 53.4 million orders at £46.06 a pop = gross sales of £2.46 billion.

Not sure about sales tax levels around the world, but let’s just take the UK 20%. So gross sales of £2.05 billion before sales tax.

Declared FY 2021 revenue was £1.74 billion, so the difference of c£300m could be the returns.

The last annual report included this note:

Estimated customer returns of £24m for the 2-3 months after the balance sheet implies BOO’s yearly returns could be between £96m and £144m.

But the annual report also says:

A difference of 1%pt in the percentage of sales returns rate would have an impact of +/- £1.6 million on reported revenue and +/- £0.8 million on operating profit. The choice of a 1%pt change for the determination of sensitivity represents a reasonable, but not extreme, variation in the return rate.

I think that implies returns could be £160m.

If I were interested in BOO, I would be comparing its returns disclosure with ASOS and trying to work out exactly what is going on. The recent warning did specify UK return rates rising above pre-pandemic levels:

  • UK gross sales up 58% vs FY21; 102% vs FY22 (FY20??)

  • UK net sales up 32% vs FY21; 78% vs FY20

  • Net sales impacted by returns rates that are 12.5 percentage points higher than last year, and 7 percentage points higher than pre-pandemic levels driven by an exceptionally high dress mix

Maynard

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Have to say, shocked that AH in his report, brushed off the £1 billion transfered from shareholders to the CEO’s son for PLT (developed almost wholly using the capital of BOO shareholders) as it didn’t affect the company/business. No - just shareholders!

Berkshire Hathaways fundmental rule is to have 'management with integrity, intelligence and energy. However, integrity is essential, as without integrity the other 2 can ruin shareholders.

My guess is that post pandemic to what is now becoming epidemic and with full re-opening, the supply chain problems ease over 6 months, but the margins of around 7% will still be crushed by Inflation - Labour inflation - minimum wage rises to £9.50p/h in April, COGS inflation, then more competition - opened shops, and value for similar products on the reopened High St, which will mean problems passing costs on. A big problem with BOO and ASOS is delivery - it’s a whopping cost - they have to have a returns policy for obvious reasons.

The high multiples of shareprice/earnings at £3 where based on 30%+ growth and expanding margins.
The shareprice is now £1 and looks more reasonable (But I have looked at the consolodated accounts only) however, for the target market under 24 yr olds there is to be a huge inflation shock in April, when the Cap comes off energy bills, wages rise, taxes rise etc… what this is is a real inflationary drop in living standards to the tune of around 5% (Poorer Households Face the Worst of the Living Standards Shock | Institute for Global Change).

It doesn’t take a genius to work out things are going to get tougher post-pandemic than during pre-pandamic imo. This is where you really need to trust the integrity of the management.

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Hi muscleriot,

Many thanks for the post and welcome to the forum!

I guess AH is looking at the PLT deal from a different angle. From the initial 66% purchase RNS

The boohoo Group will acquire 66% of the issued share capital of PLT for a cash consideration of £3.3m. This is pro rata to the March 2014 option agreement to acquire 100% for £5.0m

and the eventual 34% purchase RNS:

The acquisition is for an initial consideration of £269.8 million, with a further £54.0m of consideration contingent on the Group’s share price averaging 491 pence per share over a 6 month period between completion and a longstop date of 14 March 2024.

In the Group’s most recent financial year ending 29 February 2020, it generated an adjusted after tax profit of £86.0 million, with Adjusted Net Income to Shareholders of £69.9 million; the difference (£16.0 million) being the minority shareholders’ 34% interest in the adjusted after tax profits of PLT.

BOO paid £3m at the start of 2017 and by mid-2020 that 66% PLT stake was returning adjusted earnings of c£31m. Not bad.

Total PLT purchase price to date comes to £3m + £270m = £273m, which in return provided PLT adjusted earnings of £47m. I am not sure how PLT earnings have performed since, and there is also the £54m contingent consideration to consider, but annual £47m earnings from a £273m investment does not seem to be a disaster.

I suppose the question is why did the CEO’s son not develop PLT at BOO from the start. That could have saved BOO £273m. But he may not have developed PLT into anything like the size it became without the 34% buy-out carrot.

Maynard

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December factsheet is out:
VT-Holland-Advisors-Equity-Fund-Factsheet-2021-12.pdf (284.0 KB)

AH has bought more BOO. End of November price was 165p while end of December price was 123p. Weighting (c3.4%) and FuM (c£13m) have remained about the same, so his shareholding looks to have increased from c267k shares to c359k shares or c34%.

Maynard

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Hi
I tried did a time-line of newsflow for Boo because, according to the metrics, it may be a cheap company.

However, having looked at this in it’s entirety, there are just too many question-marks and rest of the world revenue growth has stalled/receded. I have no doubt they are a savvy management team, though.

Also, leisure apparel appears to be a very difficult sector to win long-term capital gains in, as the second chart shows.

I hope this helps anyone mulling a purchase, one way or the other!

anon

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Quick catch-up with BOO. Price closed at 74p today.

AH’s January factsheet is here:
VT-Holland-Advisors-Equity-Fund-Factsheet-2022-01.pdf (284.7 KB)

AH has bought more BOO. End of December price was 123p while end of January price was 107p. Weighting (c3.4%) and FuM (c£13m) have remained about the same, so his shareholding looks to have increased from c359k shares to c405k shares or c13%. (see posts below)

Meanwhile, Paul Scott talked to Paul Hill on 12 February 2022 (from 14m50s):

Paul S says:

“Why fight the market? For that reason I have trimmed back on some of my Boohoo. What is the share price telling us? It is grinding down almost every day. The prior-year comparatives were pretty strong this time of year, so I think it’s becoming increasingly obvious it has got another profit warning in it…and I think to myself ‘why stand in the way of that?’ and take another 20 or 30% hit. It could even be worse than that. Who knows? So I have basically been forced into cutting my position size. I’m still in it, still holding it, but it’s not a super-size position any more. Although that is largely what the share price has done!”

BOO statement due next week:

The Group will provide a trading update for the three months and twelve months ended 28 February 2022 on 10th March 2022.

Adjusted Ebitda guidance will be important in this next statement. December’s update said:

Adjusted EBITDA margin for the year is expected to be 6% to 7%, compared to previous guidance of 9% to 9.5%,

Revisiting my earlier sums…

…H2 adjusted Ebitda margins were expected to be 4.3% (£43m/£996m).

What if adjusted Ebitda margins were 4.3% for FY23? FY22 sales look likely to be £2b, so adjusted Ebitda would be £86m on no sales growth. Depreciation was running at £35m annualised for H1, so giving an operating profit of £51m. Less standard 19% UK tax gives earnings of £41m or 3.2p per share.

BOO’s net cash position is a by-product of operating with ‘negative’ working capital – i.e. owing more to creditors and similar (payables of £296m at the last H1) than what is owed by customers and similar (receivables of £48m at the last H1):

Such a working-capital position is not a problem in itself, but the net cash can’t really be deemed to be ‘surplus to requirements’. The difference between BOO’s receivables and payables is significant at £200m+ and I would not say BOO operates with truly excess net cash. The risk I suppose is if the Q3 cash burn continues and/or difficult trading sees existing payables paid off faster than new payables are created, the stated net cash position could be reduced very quickly.

Maynard

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I looked at this doc but cannot see anywhere info on its BOO holding. Am I mistaken?

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Ah, my mistake. That will teach me for working out the numbers, leaving them for a few weeks, and then not checking before I post!

Not clear whether AH has bought more BOO or not. End of December price was 123p while end of January price was 107p, but position no longer in the top ten. Maximum weighting of 3.5% and FuM of £12.7m means his BOO shareholding could have increased to 417k shares, or 16%, without being disclosed on the factsheet.

Maynard

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AH’s February factsheet now available:
VT-Holland-Advisors-Equity-Fund-Factsheet-2022-02.pdf (282.5 KB)

Still not clear whether AH has bought more BOO. Last seen in the top 10 at the end of December, when the price was 123p. End of February price was 89p, and the smallest top 10 weighting of 3.6% and FuM of £12.1m means his BOO shareholding could have increased to 487k shares, or 36% since December, without being disclosed on the factsheet.

Maynard

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This week’s BOO update:

Boohoo provides an update for the three and twelve months ended 28 February 2022. The Group has delivered net sales growth in the fourth quarter of 7% (2 Year growth: 48%), and over the full year of 14% (2 Year growth: 61%), in line with guidance. In the fourth quarter, gross sales growth was strong (+26% vs. last year and +57% vs. two years ago). As expected, net sales growth in the quarter was impacted by higher returns rates year on year due to product mix. This is expected to continue in the first half of FY23.

In the UK, the Group continues to deliver a strong trading performance with our leading proposition resonating with customers. International performance continues to be impacted by longer customer delivery times as a result of pandemic-related supply chain pressures. However, in the fourth quarter, the Group saw a return to growth in ROW due to the positive contribution from wholesale.

The Group expects, subject to audit, to report adjusted EBITDA for the financial year ended 28 February 2022 of approximately £125 million, in line with prior guidance issued in December and market expectations (company-compiled consensus adjusted EBITDA for FY22 of £125 million).

John Lyttle, Group CEO, commented:

“The Group has delivered strong growth over the last two years, which has translated into significant market share gains. We are confident that pandemic-related headwinds are short-term in their nature, and our focus is to ensure the business is well positioned for growth as these headwinds ease.”

In line with the figures following December’s update :point_down::

Q4 net sales up 7% means Q4 net sales of £501m, H2 net sales of £1,007m (+8.4%) and full-year net sales of £1,983m (+13.6%).

Adjusted full-year Ebitda of £125m means £40m for H2, versus £84m for H2 2021 and £66m for H2 2020 (pre-pandemic). H2 adjusted Ebitda margin was 4.0% versus 8.7% for H1 and c10% for FYs 2021 and 2020.

Company says “We are confident that pandemic-related headwinds are short-term in their nature”.

Back in December BOO said:

In addition, the Group’s confidence in its medium-term margin guidance for 10% Adjusted EBITDA margin is unchanged, with financial performance this financial year containing costs that are pandemic-related which will unwind, as well as our investment into recently acquired brands and the Debenhams platform that will leverage as they scale. These costs consist of:

· inbound freight cost inflation of approximately £20 million;

· outbound freight cost inflation of approximately £45 million as a consequence of higher carriage rates compared to pre-pandemic levels; and

· start-up costs of approximately £10 million into the brands acquired earlier this year

So £65m of pandemic-related headwinds and £10m of start-up costs.

Add back the £65m to the £125m now confirmed for the full-year and adjusted Ebidta of £190m gives an adjusted Ebitda margin of 9.6% without the pandemic headwinds and at the target 10% level.

The H1 statement said freight cost inflation was £26m, so extra H2 freight costs were £39m. Add back this £39m to the £40m adjusted Ebitda confirmed for H2, and adjusted Ebitda of £79m gives an adjusted Ebitda margin of 7.9% without the pandemic headwinds.

Question I guess is how long freight costs are likely to remain elevated. If the current economic headlines are anything to go by, then an early reduction to such headwinds may not be forthcoming.

Still, applying the H2 7.9% adjusted Ebitda margin before pandemic headwinds on net annual sales of £2b gives adjusted Ebitda of £158m. Less depreciation running at £35m is £123m. Less 19% standard UK tax leaves earnings of £100m or 7.9p per share.

Maynard

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AH’s March factsheet now available:
VT-Holland-Advisors-Equity-Fund-Factsheet-2022-03.pdf (284 KB)

Now become clear AH has brought more BOO!

Last seen in the top 10 at the end of December, when the price was 123p and the then 3.4% holding and £13m FuM implied 359k shares were held

End of March price was 89p, and a BOO weighting of 3.8% has now been declared. FuM of £12.6m means AH’s BOO shareholding has grown to 540k shares, up 50% since December. (Note: the factsheet contains some incorrect dates for February)

Maynard

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The FY 2022 results confirmed an early reduction to such headwinds would not be not forthcoming:

It is anticipated that revenue percentage growth will be low-single digits, and adjusted EBITDA margins for the year are expected to be between 4% to 7% as the group expects to continue to be impacted by pandemic-related factors that negatively impact costs within its supply chain and international competitive proposition.

Near-term sales are expected to be flat:

As a result, the group currently expects revenue growth to be broadly flat in the first half of FY2023, as relatively higher returns rates lead to net sales being down year on year in the first quarter, with a return to growth in the second quarter.

And other guidance:

"Other financial guidance for FY2023 is outlined below:

· Underlying depreciation and amortisation of approximately £60 million

· Net interest charge of £7million to £8 million

· Effective tax rate of circa 28%, above the rate of UK Corporation Tax due to disallowable expenditure

· Capital expenditure of £100 million to £120 million, primarily relating to investments in our distribution network expansion and automation as well as the group’s technology platform; and

· Adjusting items of approximately £60 million, of which around £45 million relates to non-cash items, including: share-based pay, acquisition intangible amortisation, exceptional costs of Sheffield automation and warehouse commissioning costs"

Assuming full-year sales flat at £2b with a mid-range 5.5% Ebitda margin less depreciation and amortisation of £60m less interest of £7.5m less tax at 28% gives earnings of c£31m of 2.4p per share.

Clearly these earlier sums :point_down: were some way out:

This line from the results is interesting:

  • Strong balance sheet with net cash of £1.3 million (2021: £276.0 million; 2020: £240.6 million). Operating cash flow of £10.3 million (2021: £201.1 million; 2020: £127.3 million). New £325 million RCF agreed in March 2022, underpinning the group’s investment programme.

Not sure a £1.3m net cash position gives a truly “strong” balance sheet. I had wondered about the net cash position: :point_down:

Net cash was £98m at H1, so a notable outflow of cash occurred during H2 and worse than I had expected.

Note that BOO’s net cash position remains a by-product of operating with ‘negative’ working capital – i.e. owing more to creditors (and similar) than what is owed by customers (and similar):

Such a working-capital position is not a problem in itself, but what there is left of BOO’s net cash can’t really be deemed to be ‘surplus to requirements’.

Note, too, that stock levels almost doubled during the year – well ahead of the 14% revenue advance. BOO says the extra stock is to service new brands. The risk perhaps is BOO also carries some fundamentally slow-moving stock.

Mid-range projected capex of £110m for 2023 is £50m more than the projected depreciation and amortisation, which could mean cash flow is £50m lower than my estimated £31m earnings above at minus £19m.

A net debt position therefore seems inevitable, and the P&L will, as BOO projects, soon suffer greater interest costs. Net debt is not ideal given the trading environment.

FWIW I still have no strong opinion…

…but the ability to sell £5 dresses at an 8% margin seems to have floundered for now.

Price is 75p.

Maynard