The Boohoo (LSE: BOO) share price was in fine form yesterday following the announcement of its deal to acquire the brand and website of department store Debenhams. As a holder, this news makes me even more confident that my stake in the company can steadily appreciate over the next few years. Let me explain why.
Bullish on Boohoo
The capture of Debenhams looks sound for a few reasons. First, it shows the level of Boohoo’s ambition. By marking its foray into new markets — beauty, sports and homewares — the company can’t be accused of resting on its laurels. Developing “the UK’s largest marketplace” should ensure it reaches an even wider audience with an increasing number of brands. On top of this, the Debenhams acquisition also gives Boohoo another route to selling its own clothes. These now include more ‘mature’ labels such as Oasis and Coast as well as the hyper-popular PrettyLittleThing.
Then there’s the price tag. For £55m, the Manchester-based business will adopt and relaunch a website that receives 300 million or so visits per annum. It also made roughly £400m in revenue last year. When one considers that Boohoo isn’t taking on the burden of any of the physical stores or stock, that looks like a blinding deal.
Another reason for me thinking Boohoo’s share price could rise over the next few years relates to the current valuation. A price-to-earnings (P/E) ratio of 32 looks increasingly reasonable for a company making money hand over fist, even during a pandemic. The argument becomes even stronger to me when it’s considered that many loss-making companies across the pond are trading at bubble-like prices.
Evidence of a speedy fix to the supply chain problems that dogged the company last year should add more pennies to the Boohoo share price. In fact, the Environmental Social Governance (ESG) funds that were quick to dump their holdings may suddenly find themselves needing to pay a far higher price to buy back in.
So, Boohoo is bulletproof?
I wouldn’t go that far. While bullish on the AIM-listed star’s future, I also think it’s vital to speculate on what may go wrong.
For one, Boohoo’s growing list of brands could become problematic. As competent as management appears to be at integrating acquisitions, there’s a risk it may be attempting to spin too many plates too soon.
There’s also a possibility that Boohoo might lose its popularity among its key demographic, namely young women. Fashion is a truly fickle industry. There’s only so far savvy marketing and a strong social media presence will take you.
As far as the shares are concerned, Boohoo could even fall victim to a flight to value in the near term. This wouldn’t be unreasonable. Some high-quality, high growth UK stocks made investors rich in 2020. The Boohoo share price has doubled since the dark days of March 2020. Some eventual profit-taking is inevitable.
Just the start
But ultimately, where the Boohoo shares go in the next few weeks and months is irrelevant to me. As a long-term holder, I place more importance on the company taking advantage of opportunities now to reap the rewards later. The Debenhams deal is a good example of this. In fact, I’d be surprised if further acquisitions weren’t announced soon. Without a doubt, Boohoo has the cash to splash.
Paul Summers owns shares in boohoo group. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.