Full year revenue at Boohoo [LON:BOO] rose 14% to £2.0bn, up 61% from 2020, the company reported this morning. Strong growth in the UK helped offset a small decline in international sales for the discount clothing company, but is this going to be enough?
Higher shipping costs and increased marketing spend meant underlying cash profit (EBITDA) was down 28% to £125.1m, in line with guidance. Cost challenges are expected to continue into the new financial year. The group’s targeting revenue growth in the low-single digits and an underlying cash profit margin between 4%-7%.
The shares were down 11.5% following the announcement. Boohoo stock is down over 12% in the last 30 days and over 75% for the last 12 months.
“Markets reacted positively back in March when we heard revenue growth was on track for the downgraded guidance, profits have followed suit, but the outlook now looks murky at best,” said Matt Britzman, Equity Analyst at Hargreaves Lansdown. “Cost and shipping challenges remain very much intact and there’s another tough year on the horizon with revenue and profit growth expected to be hard to come by.”
There’s no doubt there is demand for Boohoo’s products, but persistent shipping challenges mean servicing that demand is becoming increasingly difficult, especially in overseas growth areas. Freight and container costs remain high and gross margins erosion is an unwelcome byproduct of this challenge. US customers are still having to wait longer than they’d like to receive their orders, as supply chain issues linger on.
Has the Boohoo bubble burst?
Plans are afoot to build a distribution centre in the US which will help – but it’s costly and won’t provide an immediate solution. Fast fashion comes with customers willing to flit between brands. If they can’t get the latest trends quickly, US customers might move on permanently, adding a layer of risk to this project.
“Our experts say the Boohoo bubble has burst – with market growth expected to soften and costs rising across the world, both sales and profitability are at risk,” explained Harry Barnick, Senior Analyst with Third Bridge. “Boohoo’s customers are faced with an unprecedented rise in the cost of living and seem set to cut back on fast fashion spending as a result.”
There’re also broader issues with high return rates and lower demand in some of the group’s core markets. With loungewear no longer filling up so many virtual baskets and the more fickle tastes of occasion wear back in demand, returns are back as a bugbear. Some of these headwinds should naturally ease, but certainly not overnight, in the short-term performance will continue to be held back.
The Shein challenge to Boohoo
Barnick at Third Bridge also said that Shein’s growth has compounded Boohoo’s problems, as the Chinese competitor is taking share of wallet from the British fast fashion customer. Although relatively unknown to shoppers over 30, it has become one of the hottest tickets in town for the twentysomething fashionistas. Shein currently sells directly to more Western consumers than any other Chinese company. Part of the key to its success has been the way it has managed its supply chains.
Also not to be ignored: ESG factors are front of mind for investors and customers alike. Boohoo’s fast fashion model and poor track record of production are a key risk in this context. We believe this has significantly impacted fund manager appetite for the stock, with knock on implications for the share price.