At the beginning of this month, online retailer Boohoo (LSE: BOO) reached a significant milestone. After upgrading its sales expectations for the year, the company’s market capitalisation jumped. For the first time, Boohoo became worth more than retail giant Marks & Spencer.
The best company wins
This development created plenty of headlines but, in many ways, it was to be expected. M&S has been struggling for many years to rekindle growth. But unfortunately, customers have continued to drift away from its clothing business.
On the other hand, customers love Boohoo and its offering. The fast-fashion business is a master of online retailing. The company is one of the best in the world at developing, marketing and selling clothes digitally. It knows what it’s mostly young consumers love and can supply these items quickly, at a low price.
As such, it’s no surprise the company has hiked its growth forecasts for fiscal 2020. Management was previously expecting sales growth of 33-38% with a profit margin, before interest tax and depreciation, of 10%.
Following a strong second half, management is now expecting growth of 40-42% year-on-year, with a slightly better profit margin.
Sales growth of more than 40% for a firm worth nearly £4bn is outstanding. It seems the company isn’t planning to slow down anytime soon.
Further growth ahead
Boohoo is more than just an online clothing retailer. Over the past few years, the company has acquired a range of other businesses bargain-basement prices. As a result, it is now starting to look more like a clothing conglomerate, than fast-fashion retailer.
Last year the company acquired Coast, Karen Millen and MissPap, helping these firms avoid liquidation.
Boohoo will be hoping that it can repeat the same success that it had with Nasty Gal with these brands. The group acquired the US-based Nasty Gal brand in 2017 and threw its weight behind the business. Sales jumped 100% in fiscal 2019 to £48m. It’s highly likely the operation will report a similar performance in its current financial year.
A price worth paying
Unfortunately, Boohoo’s growth doesn’t come cheap. The stock is trading at a price-to-earnings (P/E) ratio of 57. However, the stock has always commanded a premium multiple.
In 2015, for example, some investors were willing to pay as much as 100 times earnings to get their hands on shares in the business. Since then, revenues have increased by 750%. Meanwhile, earnings per share have increased eightfold.
Investors who were savvy enough to buy the stock in 2015 have seen the value of their investments grow 10-fold.
This implies that even though the stock might look expensive right now, it could be worth paying a premium to take part in Boohoo’s growth story.
If the company can replicate the success it is had over the past few years with the new brands acquired last year, sales growth could accelerate in 2020. That’s without giving any credit to future acquisitions.
