The Boohoo Group (LSE: BOO) share price has risen by 570% in four years. But over the last two years, the fashion retailer’s shares have drifted and gone nowhere.
Is this stunning growth story over, or will patient shareholders be rewarded with another leg up at some point soon?
Can BOO beat forecasts again?
Over the last year, analysts’ have increased their earnings estimates for 2018/19 by 11% to 3.98p per share. If correct, that means that Boohoo’s earnings will have risen by 23% over the last year.
By contrast, sales are expected to have risen by about 46% to £843.9m. When sales rise faster than earnings, it usually means that profit margins are falling. That’s something we saw during the first half of the year, when Boohoo’s adjusted operating margin fell from 9.4% to 8.9%.
This isn’t necessarily a major concern, but I think it’s worth watching.
This could be a bigger problem
A more serious worry for shareholders may be that the group’s growth profile is changing.
During the first half of the year, sales at the core Boohoo brand ‘only’ rose by 15%. Most growth came from PrettyLittleThing, where sales climbed 132% to £168.6m. The group’s success with multiple brands suggests that it has a winning formula.
Yet a problem for shareholders is that Boohoo only owns 66% of PrettyLittleThing. The remaining share of this brand is owned directly its founders, Adam and Umar Kamani, whose father is Boohoo co-founder Mahmud Kamani.
This situation has created some bad feeling for Boohoo shareholders, who will not see the full benefit of PrettyLittleThing’s growth. There’s also a potential risk that the Kamanis could create more brands that would further dilute Boohoo sales.
Is the price right?
I think that Boohoo is an impressive business. But the valuation still looks demanding to me. The shares currently trade on a 2018/19 forecast price/earnings ratio of 49, with a 2019/20 P/E of 39.
This translates into price/earnings growth (PEG) ratio of 1.8 for 2019/20, well above the 1.0 level commonly seen as offering good value.
In my view, the good news is already in the price at Boohoo. I don’t see any reason to buy at the moment.
An exciting new growth story?
If you’re looking for upcoming growth stocks with exciting potential, I believe one company worth watching is Cake Box Holdings (LSE: CBOX). This franchised chain of bakeries has grown from one branch in 2008 to 114 today.
Trading as Eggfree Cake Box, the group’s selling point is that its cakes are egg-free. This makes them suitable for those following a lacto-vegetarian diet, which allows dairy but not eggs (or meat).
Sales rose by 44% to £8.28m during the first half of the year. Full-year sales for the 12 months to 31 March are expected to top £17m, according to an update today.
Profit margins are high thanks to the franchise model. Cake Box reported an operating margin of 24% for the first half of the year, suggesting that profits could rise rapidly if the rollout can be maintained.
My only concern is that like-for-like sales only rose by 6.5% last year, compared to 15% the previous year. This may indicate that growth is increasingly dependent on new store openings.
Despite this, the share’s PEG ratio of 0.8 suggests they could be attractively priced at current levels. I think this is one to watch.
