After a turbulent quarter for boohoo.com, will it continue to dominate high street retailers?
The impact of the Covid-19 has accelerated the period of creative destruction within the high-street fashion industry. With the imposition of a national lock-down, consumers have been driven online, benefitting online, ‘value fashion’ retailers such as boohoo.com. The strength of latest earnings report bodes particularly ominously for the future of high-street retailers. With a strong social media presence, vast choice and such affordable prices, boohoo.com has increased users by 40% this year but the past year has been a turbulent period for the firm.
Over the past 5 years boohoo.com has experienced significant growth, with its share price rising from 375p to over 400p in June 2020. The company has consistently grown over this period to become an industry heavyweight with a market capitalisation of 3.4 billion GBP. With the company reporting sustained increasing profits, expanding user base and a clear path to replicating past success, investors were prepared to pay in excess of 60 times earnings in June. Despite an initial Covid-19 sell-off in March share prices rallied higher until early July when the Sunday Times reported rumours of boohoo.com’s Leicester factory. It has since been proven the company had taken no measures to prevent the Covid-19 spread, in the then locked-down Leicester, but crucially reports of them paying workers 3.50 GBP per hour. The announcement then led to the share price falling over 50% to below 200p per share, as multi-million-pound asset managers, supposedly underpinned by ESG principles, fled from the shares. Since, the share price regained ground to 390p per share but recent news of PWC refusing to renew the auditing tender of the firm due to company ethics, the share price has since fell to 270p.
The company is coming out of the pandemic with group revenues (+45%) and EBITDA (+48%) showing strong growth, however volatile share price movements over the past 6-month period seemingly overshadow this strength. It must be remembered that this growth has come during a year impacted by the Covid-19 pandemic and growth is inevitably at the cost of high-street retailers. With the online shift away from the high-street, if boohoo.com can ensure the 17.4 million active users (+34% on the previous yet) return for future purchases there should be continued earnings to be achieved. Many also fear millennials’ response to ethical allegations about the company, driving customers towards competitors. However, the immediate aftermath has been in stark contrast as shown by the sales figures. Therefore, are analysts predicting a consumer response that simply hasn’t materialised? Regardless, the strong response to improving compliance, conditions and worker pay has helped assure uncertain customers.
However, the main issue presenting the firm is the same as that facing rival ASOS. Despite similarly strong results Asos shares fell 10% after reporting earnings. Analysts fear the impending global recession and its impact on these firms. Both companies have derived significant growth from the 20-30 age group, but fears are mounting about how heavily this age group in particular will be affected by the effects of an economic downturn. While results have been strong the ability for boohoo.com continue sales growth is unclear.
Boohoo.com has mobilised a vast group of consumers seeking ‘value fashion’ quickly and has built a dominant online presence to achieve this, over a number of firms beneath the
umbrella company. Despite a series of negative headlines impacting the share price, the company financials have been strong in a sector typically positively correlated to the economic cycle. The company’s financial resilience has it strongly placed to continue to perform over the immediate future and continue to take market share from fledgling high-street retailers. Problems still exist in convincing shareholders and regaining the backing of socially conscious investors but managements’ reform engagement after the Levitt Report make the long-term upside potential significant at 270p per share.
Analyst: James Harden
Sector Head: Morgan Sword
Editor: Harry Forbes-Nixon