Manchester-based fast fashion e-tailer Boohoo Group (LSE: BOO) became the latest retailer to report on recent trading this morning, including the all-important festive period. Like peer ASOS, however, a retreating share price would indicate that the market was expecting more, even if most companies would kill for the sort of numbers being mentioned.
Should Foolish investors regard this reaction as an opportunity or a warning?
Revenues and margins soar
Let’s check those figures first. The Boohoo eponymous brand generated £163.5m in sales over the period, bringing year-to-date revenue to £372.5m — a rise of 15%. Rising star PrettyLittleThing did even better, almost doubling revenue to £144.2m and achieving total sales of £312.8m for the financial year so far.
While starting from a far lower base, acquisition Nasty Gal — purchased by Boohoo back in 2017 — was no slouch either, raising £20.6m over the period and £38.3m in the year-to-date (a rise of 89%).
All told, group revenue growth of 44% (or 43% once foreign exchange fluctuations are taken into account) to £328.2m was achieved over the four months to the end of December — seriously impressive stuff.
Perhaps most importantly for those who have been following/holding Boohoo for some time, however, was the fact that all three brands also showed an improvement in gross margins. As a result, group gross margin rose 1.7% (to 54.2%) over the reporting period.
Encouraged by these figures, AIM-listed Boohoo remarked that group revenue growth for the full year to the end of February is now expected to be higher than previously expected (38% to 43%) and somewhere between 43% to 45%. Earnings margins were also tightened to between 9.25% to 9.75% from 9% to 10%.
Given the pessimism that surrounds the retail sector at the current time, these numbers are clearly very positive. So, why has the stock lost well over 8% in value since the markets opened?
Valuation concerns
Boohoo’s shareholders endured a rollercoaster 2018, with the stock rising and falling like a yo-yo over a trading range of between 141p and 244p. While some of this was related to the aforementioned concerns over declining margins, worries over a Brexit-induced reduction in consumer confidence and the company’s sky-high valuation surely contributed. It was the latter that forced my hand back at the start of October when I reluctantly sold my own holding and looked for value elsewhere. When consistently great trading is greeted with a collective shrug, it implies many are doing the same.
To be clear, I think there’s still an awful lot to like about Boohoo.
While the UK remains its main market, the pace of growth in other regions, particularly the US, has been nothing short of superb. Revenues in the latter grew 75% in the 10 months to the end of September, highlighting just how much potential there is for the company beyond these shores. In addition to this, the company continues to possess a rock-solid balance sheet with a net cash position of £189m (almost 50% higher than at the start of 2018).
Nevertheless, Boohoo’s valuation (48 times expected earnings before this morning) has become increasingly uncomfortable if, like me, you’re concerned by the possibility of a slowdown in the economy in 2019. And no company is worth buying for any price, regardless of how good it is.
On a long-term view, I fully expect Boohoo to continue performing for shareholders. For now, however, I’m happy to stay away.
