I wouldn’t normally look at a company like Boohoo Group PLC (LSE:BOO, Financial). It is quoted on London’s junior market AIM, which means it has less transparency and standards of corporate governance than the Main Market. But in doing my research on Next PLC (LSE:NXT, Financial), I read a bit more about this junior company. I assumed it would be overvalued and have weak financials.
To my surprise, Boohoo Group is significantly undervalued according to the GF Value indicator. It also has a decent Piotroski F-Score score of 7, which puts it into the “value” camp. Finally, an Altman Z-Score of 8.6 shows that it is very strong financially.
So how about the company itself?
Boohoo is a “fast fashion” company. In fact, it could be described as a “super-fast fashion” company. The stock is down 32% in the last year as investors have stepped away following a scandal about poor treatment of workers, followed by a sales and margin downgrade late last month. Indeed, since the summer, the stock has underperformed its main rival in U.K. fast fashion Asos PLC (LSE:ASC, Financial).
However, Boohoo is different to Asos. It sells its own brands, which means it has a higher margin of 8.7% versus 5.8% in the first half of the year. Selling your own brand is always going to be a higher margin, as selling other people’s brands means your suppliers need to receive their own margin too. Asos has also had to spend big on fast delivery and marketing to bring in customers.
Asos has also been trying to expand internationally, while Boohoo is concentrating on its home market. Boohoo recently purchased U.K. name brands Debenhams, Burton, Wallis and Dorothy Perkins and has been working on integrating them into its own online platform. The impressive revenue growth achieved from its earlier acquisitions, Nasty Gal and Pretty Little Thing, give me the confidence it can pull off the same trick with these recent acquisitions.
Traditionally, Boohoo’s core target age demographic was the 18 to 24-year-old female group. The purchase of Burton, Wallis and Dorothy Perkins (from distressed seller Arcadia) means Boohoo is diversifying its customer base. But this is the second step along this expansion strategy. The earlier acquisitions of higher price-point retailers Karen Millen and Coast were the first steps. The Debenhams purchase also further diversifies its end markets by offering homeware and achieves larger scale in its combined beauty business.
Boohoo’s capex this year is due to be 25 million pounds ($34.3 million) more than management initially guided, at 275 million pounds. That’s mainly thanks to an initial investment on its first American distribution center and the new online sales platform at Debenhams (legacy Debenhams failed as it didn’t have a coherent ecommerce business, unlike Boohoo and Asos).
The company had a net cash position of 94 million pounds at the end of August, down from 345 million pounds at the same time last year. The company produces high levels of cash from operations, meaning it doesn’t need to raise equity to fund these investments. The AIM market is notorious for secondary equity offerings.
It seems to me that Boohoo can maintain the net cash position that it has always had since its initial public offering, and we could well see net cash over 200 million pounds by early next year.
Supply chain issues will probably dent margins from previous guidance of 10% to 9%. Asos, with a larger U.S. footprint, has already warned that higher freight costs have started to eat into margins. However, with air traffic to the U.S. starting to normalize, freight costs to the U.S. (much of the gear is made in the U.K.) should start to come down next year.
Fast fashion is notorious for low costs, so unlike luxury fashion, where Burberry (LSE:BRBY, Financial) can easily pass through costs to customers, for example, Boohoo might in the short term find it difficult to pass on cost increases to its mostly young and cost-conscious clientele, if it wants to stay competitive. However, Boohoo’s investments in warehouse efficiency are starting to reap benefits, and its larger scale thanks to the aforementioned acquisitions should give it greater bargaining power with suppliers. Boohoo is also famous for keeping inventory levels well managed, so it is unlikely that it would face too large supply chain disruption, as everything is done on a “test and repeat” basis, meaning it never commits to large, long-duration orders. This derivative of the just in time management technique was copied from the original fast fashion company, Spain’s Zara, which made parent company Industria De Diseno Textil SA (XMAD:ITX, Financial), better known as Inditex, one of the largest fashion companies in the world.
The scandal about its treatment of workers was a big corporate governance failure for Boohoo. The company is working through 34 operational changes identified as part of its “Agenda for Change” review. The scandal was clearly a bigger deal in the stock market than for Boohoo’s customers (who are unlikely to read the financial pages). Sales are expected to be 20% to 25% higher this year, which is a good result given its e-commerce business thrived during the lockdown periods last year, as the company quickly switched its offerings to comfortable, stay-at-home loungewear.
It seems the price action in recent months makes it a good opportunity to get into this interesting growth at a reasonable price stock.
AIM higher
With a market cap of 2.4 billion pounds, the stock would easily make the FTSE 250 if it decided to graduate to London’s Main Market with a Premium Listing. It would achieve less of a governance discount if it were to do so. The stock goes on my watchlist as I rarely invest in AIM stocks. If it can get a Premium Listing on the Main Market, it would be much more attractive. With higher governance levels, it might have avoided last year's worker scandal.
