Since January 2015, shares in online fashion retailer Boohoo.Com (LSE: BOO) have tripled in value. For most investors, this would represent a fabulous return in a very short period of time. As the dust settles around yesterday’s interim results, many may begin to ask themselves whether this kind of performance can continue.
Excellent interims but…
Few would fail to be impressed by the figures released on Wednesday. Revenue and operating profit soared by 40% and 135% respectively. The company has been making excellent progress in international markets (particularly the US), so much so that it now represents 36% of total revenue. Trading has been so good that Boohoo has an enviable cash pile of just over £61m. Make no mistake, investors have a lot to smile about.
The confidence the market has in the company is clearly reflected in its high forecast rolling price-to-earnings (P/E) ratio of 57. This is the sticking point. Richly valued companies usually give rise to unrealistic expectations. On a long enough timeline, disappointment is inevitable. Moreover, the mere hint of a slowdown in earnings growth can have a disproportionate effect on the price of a share as investors fret over short-term issues. If in doubt, take a look at what happened to the shares in one of boohoo’s competitors, ASOS, back in 2014.
Reasons to be cheerful
Reflecting on the above, it wouldn’t be unreasonable for some investors (particularly those with shorter horizons) to consider taking some profits at some stage in the near future. As such, a degree of pullback in Boohoo’s share price over the next few months is possible, despite its wonderfully consistent performance over the previous 20.
That said, I remain very positive on the company over the medium-to-long term for several reasons. Firstly, it seems undeniable that pureplay online businesses will continue to steal customers away from the established high street retailers. For evidence of this, compare Boohoo’s recent performance with that of Next (LSE: NXT). True, they may be focusing on serving different consumer groups (for now) but the latter’s decision to expand its net trading space is brave considering the current retail environment and recent results. While Next remains the best of a struggling band (including Debenhams and Marks and Spencer) and its shares look incredibly cheap on a P/E of just under 11, I just can’t see its fortunes significantly improving any time soon.
Secondly, Boohoo is rapidly expanding its offering by introducing clothing ranges for men and, more recently, children. While the popularity of the latter will be revealed in time, I see no reason why the fast fashion formula that has worked so successfully for its women’s range can’t be replicated given how ambitious the company’s management appear to be.
Thirdly, there’s the very real possibility that the company will go on to purchase Pretty Little Thing for £5m by March next year. Founded by Umar Kamani, the son of one of Boohoo’s founders, the former has been creating quite a stir on its own among its young target market. Buying and integrating this business would further underline Boohoo’s intention of becoming the go-to destination for cheap, disposable fashion (and that’s a compliment).
In my view, Boohoo is and will remain a class act for some time. An undeniably expensive share, but perhaps reassuringly so.
