Today’s muted stock market reaction to fashion retailer Boohoo’s (LSE: BOO) stonking half-year figures suggests the outcome was already in the price.
And that’s the dilemma faced by investors with well-known growth stories. Although the firm’s operational progress is compelling, the valuation looks full to my eyes. Today’s share price close to 263p puts the forward-looking earnings multiple for the trading year to February 2021 at just above 40.
Great results
But I can’t deny the ‘awesomeness’ of these results. In the first half of the trading year, revenue rose 43% compared to the equivalent period the year before, adjusted diluted earnings per share shot up 46% and the company’s net cash position increased just over 33% to a little over £207m – Boohoo is raking it in, to use the vernacular, and the balance sheet is robust.
Since starting up in Manchester in 2006, the company has been a rip-roaring success, growing rapidly in the UK and abroad with its offering for 16 to 40-year-olds. Today’s report reveals to us that strong revenue growth in the period was achieved “across all brands and geographies.”
The firm has moved beyond its Boohoo brand and acquired PrettyLittleThing and Nasty Gal along the way. And in further extension of the strategy, the company acquired more brands in the period in the form of MissPap, Karen Millen and Coast, which it sees as complementary additions to its “scalable multi-brand platform.”
Looking ahead, Boohoo expects revenue growth for the full year to come in between 33% and 38%, suggesting the company’s expansion programme remains in the fast lane. The directors exude confidence and predict that over the medium term they expect revenue to grow “at least” by 25% per year.
Chief executive John Lyttle said in the report that Boohoo had achieved “significant” gains in market share, and he pointed out that revenue has exceeded £1bn over the past 12 months “for the first time in our history.” He anticipates further gains ahead, underpinned by the company’s “well-invested infrastructure” and prowess in the execution of the service.
A potential drag on share price performance
I can’t help but share his enthusiasm and expectations for Boohoo’s operational growth, but whether the stock will make a decent investment from here is another question entirely. A glance at the share price chart makes it obvious that the best gains for shareholders occurred between early 2015 and mid-2017. Driven, no doubt, by the emergence of the growth story and a valuation re-rating upwards.
However, the share first hit current levels around two years ago and has sagged in between. Meanwhile, with the market capitalisation now above £3bn, Boohoo is no longer a small-cap share. As all companies continue to grow, the larger they become, the more pressure there is for rates of growth to slow. When that happens, valuations can shrink too, which often puts a drag on the progress of a share price.
I think such a scenario could play out with Boohoo now, so I’m looking for the next up-and-coming smaller-cap growth stocks instead.
