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Why shares in this growth stock should keep rising in February

Image: Boohoo.Com: Fair use

It’s been an eventful start to 2017 for online retailer Boohoo.Com (LSE: BOO). Only last week, shareholders were bracing themselves for a negative reaction to the stock following a Channel 4 Dispatches investigation which appeared to show evidence of dubious working practices at the company’s warehouse in Burnley.

This week, however, coverage is likely to focus on Boohoo’s proposed acquisition of Nasty Gal — the American retailer which filed for bankruptcy last year.

Getting Nasty

Yesterday’s announcement that no other acceptable/qualifying bids had been made for “certain intellectual property and customer databases” belonging to Nasty Gal leaves the door open for Boohoo to bring the brand under its wing. A lack of auction now means that it will capture at least part of the hugely popular company for $20m, financed from existing cash reserves and a new bank debt facility.

Quite whether the deal will be applauded by shareholders will depend on exactly what Boohoo has agreed to purchase. With few details being made public, it’s no surprise that shares in the Manchester-based business dipped slightly on Monday’s news. 

That said, concerned holders shouldn’t have long to wait. The company has already indicated that it will provide more information once full approval of the acquisition is given by the US Bankruptcy Court. This could come as soon as tomorrow (Wednesday). If all goes to plan, the deal will be done and dusted by the end of the month. Assuming investors like what they hear, expect the share price to reach new highs this month.

Still a buy?

Having said this, the question now remains as to whether — after a remarkable 12 months in which the company’s share price has soared over 230% from 41p to 138p — Boohoo’s share’s are still worth buying for the medium-to-long term, particularly as they now trade on a huge price-to-earnings (P/E) ratio of 70. I think so.

The proposed acquisition of Nasty Gal represents another strong statement of intent from Boohoo’s management, especially coming so soon after the company’s 66% acquisition of PrettyLittleThing. The fashion retailer was co-founded by Umar and Adam Kamani (sons of Boohoo joint CEO, Mahmud Kamani). If, as indicated, the company wants to build its presence in the US, I struggle to see a more cost-effective and quicker way of doing so than by purchasing elements of a business that already has a significant following in the country. If it can raise the profile of its other brands while selling Nasty Gal clothing to existing customers, there’s every chance Boohoo will continue growing revenue and profits at a furious rate over the next few years. It really comes down to how adept its management is at spinning several plates at once. 

I also think that the company remains a better investment than fashion peer ASOS (LSE: ASC), despite the latter reporting stellar international sales last month. At only a third of its size with far higher operating margins and predicted earnings per share growth, Boohoo looks the stronger play. The fact that the latter can also boast far higher returns on capital adds support to this view. As discussed here, this figure particularly important when searching the market for shares capable of performing well over the long term.

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Paul Summers owns shares in boohoo.com. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.