The Boohoo (LSE: BOO) share price crashed in early trading this morning. This is despite news the fast-fashion giant had achieved record sales over the six months to the end of August.
Let’s take a deep dive into today’s statement and extract the key points that current holders (like me) and prospective buyers need to know if we’re to decide whether this is fall’s justified.
Reasons to be cheerful
Why not start with the positive news? For me, there was actually a lot to like in today’s statement.
Claiming to be “leading the fashion eCommerce market” is no small boast. With Boohoo, however, it’s starting to look increasingly justified. The business achieved £976m in sales over the period — a rise of 20% over that achieved in the same period in 2020.
More importantly, this was 73% up on the £565m logged two years ago. Considering the damage wreaked by Covid-19 last year (and despite Boohoo managing to do very well considering), I’m taking this latter percentage as better evidence of just how well the company’s expanding.
What’s more, this growth isn’t restricted to its home market. In addition to sales increasing by 81% in the UK over this two-year timeline, Boohoo’s international sales jumped 63%. A 126% rise in the US is further evidence of just how well the company’s travelling.
When you consider how much criticism it’s has faced over the last year, due to concerns over the quality of its suppliers and its potential to impact shoppers’ behaviour, this is pretty stellar stuff.
Boohoo’s share price crash
So why the crash? There are a few reasons. Despite the huge sales figure, adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) fell 5% to £89.8m. As the company pointed out, this was 40% higher than that achieved in 2019.
However, it was lower than what the market was expecting, due in part to “£26m of freight and logistics costs inflation.” And the market can be brutal if it doesn’t get what it wants. Adjusted pre-tax profit fell 20% to £63.8m.
Although no great surprise, some investors may also be put off by the company’s intention to continue throwing cash at existing and new brands. Capital expenditure for the full year is now likely to be in the region of £275m — 10% higher than the maximum Boohoo previously predicted. Due to infrastructure and marketing spending to date, Boohoo’s war chest of cash is already much depleted to £98.4m.
Other possible reasons for the Boohoo share price tumble include a reversion to pre-pandemic return rates and competition from physical stores. Neither of these should really come as a surprise, but investors are clearly in an unforgiving mood.
And then there was the change in guidance…
Lower sales growth
Today, Boohoo said it expects full-year sales growth of between 20% and 25%. Previously, it had targeted 25% growth. For a company that’s consistently raised expectations over the years, that was always likely to sting.
To achieve this, BOO will need to post growth of 20-30% in the second six-month period. On a positive note, the company made a point noting that demand for its fashion brands had improved last month, especially in the UK. This momentum has apparently continued into September with gross sales growth higher than that seen in Q2.
Naturally, there’s no sure thing when it comes to business and, consequently, investing. As things stand, Boohoo is expecting the impact of Covid-19 factors to “normalise over the medium term” but there’s no guarantee this will happen. Moreover, the initial rush to purchase new clothes as the UK emerged from multiple lockdowns could/will moderate. Competition from online-only rivals such as ASOS will remain fierce too.
Those rising freight, logistical and labour costs certainly won’t disappear overnight either. Again, Boohoo believes these headwinds will eventually reduce thanks, in part, to its recent investment in its infrastructure. But again, it has little control over this in reality. Indeed, Boohoo already thinks margins could fall to 9-9.5% from the previous estimate of 9.5-10%. This seems likely to be another reason for investors heading for the exits this morning.
Operational progress
As a holder, I need to be comfortable with the above. And I am. Short-term headwinds aside, Boohoo’s a very different beast than it was even last year. Having snapped up brands when everyone else was losing their heads, the company now has an addressable (and dressable) market of 500 million potential customers.
How much of this it’s able to capture remains to be seen. Even so, significant progress has already been made on an operational level. Over the six month period to August, Boohoo has relaunched four new brands it bagged on the cheap.
Of these, Debenhams is by far the most interesting acquisition for me since it opens up a whole new set of markets, including homewares and beauty. If it can work its magic here, today’s fall in the Boohoo share price will be but a blip in time.
On top of this, there’s a commitment to opening a new distribution centre in the US. This should further boost Boohoo’s presence in what’s already proving to be a very lucrative market for the £3bn-cap.
Away from the headline numbers, there’s also clear evidence (in my opinion) that Boohoo is actively addressing those ESG concerns via its ‘Agenda for Change’ initiative. Lists of UK and international suppliers have now been published, providing visibility to concerned investors. The company is also beginning to stock more sustainable clothing and will launch a ‘resale platform’ next year.
Staying put
As a holder of the stock, I’m obviously gutted by the market’s reaction to today’s news. It is, however, not completely surprising, given the tendency of traders to sell first and evaluate later.
Share price shenanigans aside, the fact that Boohoo is experiencing similar problems to other listed companies, but still managing to grow strongly, gives me a lot of confidence. If anything, I believe today’s crash in the Boohoo share price is a golden opportunity for a long-term holder such as myself to continue increasing my stake in the company.
The investment case hasn’t changed, after all. If I’m truly the Foolish long-term investor I believe myself to be, I simply need to sit tight and ride out the storm.
The Boohoo share price is now 40% below where it stood this time last year. Anyone buying back then has my sympathies. Notwithstanding this, the margin of safety is surely now better than it’s been for a very long time.
Having made the mistake of snatching at profits with Boohoo in the past, I’m in for the long ride.