Why the Boohoo share price still looks cheap

The Boohoo share price (LON:BOO) has barely reacted to today’s trading update, but Paul Summers thinks the valuation is still cheap for the growth on offer.

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The Boohoo (LSE: BOO) share price barely moved in early trading this morning. That’s despite the company providing what I believe to be another encouraging update on trading over the first quarter of its new financial year. Personally, I think the investment case here remains compelling.

“Phenomenal growth”

Total revenue hit just over £486m in the three months to the end of May. That’s a rise of 32% from the same period in 2020. 

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According to CEO John Lyttle, this “phenomenal growth” is even more impressive considering the strong comparatives from the previous year as more people shopped online under lockdown. It also represents a 91% jump over the last two years. 

Fueled by the gradual lifting of restrictions, sales in the UK (Boohoo’s most established market) jumped by 50% to £274.6m. Across the pond, US revenue rose by 43% to just short of £132m.  

In the rest of Europe however, sales weren’t so stellar, with revenue declining 14%. This was most likely due to ongoing concerns over the pandemic. In its ‘Rest of the World’ markets, sales declined by a similar percentage.

This rather mixed performance, combined with the lack of change to guidance, goes some way to explaining why the Boohoo share price isn’t climbing today.

What next for the Boohoo share price?

Going against its reputation for increasing forecasts over the year, the company said it still expected revenue to grow by 25% in the full financial year.

I’m still optimistic that this number will be lifted later in the year and Boohoo’s share price will react accordingly. The acquisition of the Dorothy Perkins, Wallis and Burton brands should begin bearing fruit. The launch of the new Debenhams website, featuring beauty and homewares as well as clothes, also adds some product diversification to Boohoo’s portfolio.

Combine all this with those rocketing sales in the US and the opening of two new distribution centres in the UK and I think Boohoo’s valuation of 30 times earnings still looks ‘cheap’ for the growth on offer. Tellingly, the company’s PEG (price/earnings to growth) ratio is 1.1. This implies new investors are getting a good deal. 

Making amends

I’m also heartened by today’s update on the progress made by Boohoo in addressing concerns over its supply chain.

In his third report on the matter, Sir Brian Levenson said that the company was now “demonstrating a degree of due diligence which may well go beyond that which is undertaken by other retailers or in other industries.”

As a shareholder, I find this very comforting. So long as the company proceeds to publish its full (revised) global supplier list in September as planned, I suspect previously nervous fund managers will be willing to add the stock back to their portfolios. This should do no harm to the Boohoo share price.  

Happy holder

As a holder of the stock, I’m naturally biased. But it’s clear Boohoo could still face headwinds in 2021. A full re-opening could (temporarily) see fewer people heading online and wanting to spend their hard-earned cash on other things, such as foreign holidays. One also needs to keep in mind that sales in some markets could get worse before they get better, due to relatively sluggish vaccination rollouts.

With near-£200m in net cash and a runway for ongoing growth however, I’m very relaxed about staying invested in Boohoo. 

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