Shares in Boohoo.Com (LSE: BOO) have taken a bit of a beating over the past three months. Since mid-August the stock has declined by 18%, dramatically underperforming the broader market.
These declines have curbed the company’s year-to-date gains. At the end of September shares in Boohoo were up 90% on the year, and trading at an all-time high. After the recent slump, the stock is up ‘only’ 42% year-to-date.
I believe that there could be further gains ahead for investors as the company continues to grow earnings and expand overseas.
Look to the fundamentals
While the company’s share price action over the past three months might suggest that investors have given up on the firm, the underlying business is still going strong.
At the end of September, the company reported year-on-year revenue growth of 106% for the six months ended 31 August. Gross profit jumped 99% year-on-year, pre-tax profit rose 45%, and cash at the bank nearly doubled to £119m. The one downside of these figures is that profit margins are contracting. In the first half, the group’s gross margin declined by 2% to 53.3% and the adjusted EBITDA margin contracted by 2.4% to 10.6%. For the full-year, management is guiding for the latter to be 9%-10%.
It’s easy to see why these contracting margins would spook investors. Rising revenues and falling margins mean that the business is having to spend more for each £1 of sales. Selling clothes has always been a highly competitive business, and as trading conditions get tougher, it looks as if Boohoo is having to spend more to attract customers.
Also, the group could have also become its own worst enemy. Its growth has been fuelled so far by its online presence and low prices — clearly a strategy that works. If other companies copy this strategy, it will result in falling margins across the industry.
However, I should also say that the past year has been one of significant expansion for Boohoo and costs associated with this growth have weighed on margins. What’s more, if the company does get dragged into a price war, its reputation, economies of scale and cash balance should help it come out on top.
Time to buy?
Even though the market has taken against the company in recent months, I believe that this could be an excellent time for investors to buy into the stock, despite the current still-high valuation.
City analysts are expecting the firm to report earnings per share growth of 27% for the fiscal year ending 28 February 2018, followed by an increase of 28% for the next period.
If the business can continue to grow at this rate, within eight years earnings per share will have risen to 19p, a multiple of 10 times earnings at the current price. Further, with a cash balance of nearly £120m, there’s scope for hefty cash distributions from the business.
