Boohoo Group PLC (LSE:BOO, Financial) (BHOOY, Financial) is a fast-fashion online retailer based in the U.K. The company benefited massively from the shutdown in brick and mortar retail stores during 2020, and the huge boom in e-commerce as a result. Its market capitalization even skyrocketed to over 2 billion pounds ($2.5 billion).
Since April 2021, however, its stock has been butchered by 88%. The decline was driven by a series of scathing short seller reports and manufacturing labor controversy. But the main surpressor of the stock has been a huge increase in freight and logistics costs, which have eaten into its margins.
A positive is management has announced a series of changes and the stock could offer a deep-value opportunity for the long term. Let’s dive in to find out why.
Business model
Founded in 2006, the company quickly became a pioneer in the runway to e-commerce model.
Its designers are inspired by the new outfits at the world's most famous fashion shows and then launch inspired pieces online at a fraction of the cost, all within a matter of weeks.
Its core value proposition is really to allow consumers to order a lot of outfits and effectively dress similar to their favorite celebrities, at a rock bottom price.
Boohoo has also been an early pioneer in influencer marketing. The company has scored joint campaigns with the Kardashians, Jennifer Lopez, Paris Hilton and many other celebrities.
The company owns popular brands such as PLT, Miss PAP, Karen Millen, Warehouse, Burtons, Oasis and many more.
Challenged financials
The company reported 1.76 billion pounds in revenue for fiscal year 2023, which ended in February. This represented a decline of 11% year over year. The decrease was mainly driven by a general pullback in the e-commerce market after a large boom in 2020. However, its revenue is still up 43% since 2020, and so its financials are not as bad as they initially seem.
Its active customers showed a similar trend with 18 million reported for the year, down from 19.9 million in 2022. This is still up from the 13.9 million in 2020, however. Further, it is useful to keep in mind that this number is likely skewed by the acquisition of U.K. department store Debenhams, which it bought for 55 million pounds in 2021. The deal included the acquisition of 6 million beauty club customers.
Progress has been made with the Debenhams digital department store. Its beauty program has been relaunched online with 1,600 brands signed up.
Average order value or basket size rose by 11% year over year to 53.32 pounds, which was also positive. Its conversion rates also increased to 3.74%.
Breaking down sales by region, the U.K. is still its largest market, generating 62% of revenue or 1.09 billion pounds for the full year. Sales in the region did drop by 9% year over year, but it still has a strong three year growth rate of 61%.
Return rates were a major issue for the business due to changing product mix. However, the company has introduced a return charge of 1.99 pounds, which I believe is better late than never. Its competitors, such as ASOS and H&M, have also introduced a similar charge, so this should not impact its competitive position.
European revenue fell by 6% year over year, but is up 10% since 2020. International revenues also reported a similar trend with a decline of 13% year over year, but an increase of 22% since 2020.
Its U.S. sales were 363.7 million pounds in 2023, which was down 19% year over year. However, its sales in this region are up 38% over a three-year period.
A key is in the U.S. market is elevated delivery times, which is negatively impacting customer demand and experience. A positive is the business has a 1.1 million square foot distribution center coming online later this year with a phased approach. The first stage will enable manual processing of items with automation setup in future years.
This is expected to reduce delivery times from an unreasonable 10 days to three days across most U.S. states.
Another positive is the company has a track record of building out successful fulfilment centers. In 2018, Boohoo opened its Sheffield Fulfilment Center in the U.K., which was then automated. The total investment was a staggering 125 million pounds, but management said it is on track to generate a payback within four to five years due to efficiency savings.
Overall, the company’s infrastructure is expected to be able to support over 4 billion pounds in net sales, more than double 2023 figures.
Therefore, although this huge capital expenditure (91 million pounds in 2023) has been painful for investors, it should improve the company’s long-term prospects.
Profitability challenges
The profitability of the company has been the major challenge over the past several years.
Its adjusted Ebitda was 63.3 million pounds in 2023, down 49% year over year.
Its loss before taxes was an eye-watering 90.7 million, down from 7.8 million pounds in profit for 2022 and the 92.2 million pounds profit in 2020.
This was mainly driven by 44.9 million pounds related to “exceptional items” related to setup costs for the U.S. warehouse facility and various restructuring costs.
The company did lay off around 100 workers from its London office, but this was a small amount given it employs over 2,000 people.
A major positive was Boohoo reported a solid improvement in operating cash flow with 130.9 million pounds, which was an improvement from 10.3 million pounds in the prior year.
Free cash flow also improved to 30.2 million pounds, compared to an outflow of 251.2 million pounds a year ago. This improvement was driven by inventory adjustments, which decreased 36% from 279.4 million pounds to 178.1 million pounds.
Long term, the company plans to get back to a 6% to 8% adjusted Ebitda margin and double-digit growth. Management aims to accomplish this through a variety of actions, from the aforementioned fulfilment center openings to reducing returns.
Management's base salary is fairly reasonable from my review, with a 200% annual bonus opportunity for hitting various targets, which include 20% growth in sales and 30% growth in adjusted Ebitda.
Investors were not too happy about the 32 million pounds in equity-related expenses, which was up from 26.1 million pounds in 2022, though management believes this incentive is required.
Its overall liquidity has improved to 330.9 million pounds thanks to 325 million pounds from a rolling capital facility.
Deep value?
Boohoo trades at a price-sales ratio of 0.29, which is 87% cheaper than its five-year average.
Its forward enterprise value/Ebitda ratio is 8.42, which is 56% cheaper than its average over the same period.
Based on its historical ratios, past performance and analysts' future projections, the GF Value Line indicates a fair value of $45.61. As such, the stock is substantially undervalued at the time of writing. The metric does warn of a possible value trap, which I believe is the result of a decline in margins. However, in the long term, this is likely to be resolved.
Final thoughts
Boohoo is a fast-fashion pioneer that is poised to benefit from the continued growth in e-commerce. The company has faced a number of challenges over the past couple of years. However, the huge capital expenditure invested into new facilities should help to make the business more competitive and improve margins. Given the stock's cheap valuation, it could be a great long-term investment.
