Key points
- In a trading update for the three months to 31 December 2021, net sales rose 7% year on year
- Adjusted earnings for the year ended 28 February 2022 are expected to be £125m
- The firm has a compound annual EPS growth rate of nearly 32%
Online fashion giant Boohoo (LSE:BOO) owns a number of recognisable brands such as PrettyLittleThing and Debenhams. Yesterday, the Boohoo share price was up 13% after a trading update. It currently trades at 87.5p. I want to know more about this update and how the firm is performing over the longer term. While I already own shares in the business, should I now buy more? Let’s take a closer look.
Why did the Boohoo share price jump?
The company released a trading update yesterday for the three months to 31 December 2021. Striking a positive note, it stated that net sales for the period rose by 7%, year on year. On a two-year comparison, net sales increased by 48%.
Furthermore, gross sales rose by 26% with 57% growth on a two-year basis. For the full 2021 calendar year, overall sales grew by 14%. Compared with the 2019 calendar year, this was a 61% rise. This suggests that the firm is exhibiting consistent and sustained sales growth.
On the other hand, the update stated that operations were still “being impacted by higher returns rates”. This is not a new problem and it prompted Barclays to downgrade the company to ‘underweight’. Cutting its target price from 135p to 85p, the investment bank believes the firm is “coming out of the pandemic with the challenge of sustaining elevated growth”.
However, the trading statement also explained that the business expects adjusted earnings of £125m for the year ended 28 February 2022. This was in line with prior guidance and investors reacted with some excitement yesterday.
Historical results and wider issues
Looking further back, Boohoo also has a strong results record. Between 2017 and 2021, for the years ended 28 February, revenue increased from £294m to £1.7bn. Furthermore, earning per share (EPS) rose from 2.23p to 8.89p.
By my calculation, this means that the firm has a compound annual EPS growth rate of nearly 32%. This strong record gives me great confidence in the company. It should be noted, however, that past performance is not always a reliable indicator of future performance.
In addition, the firm announced the completion of its Agenda for Change this month. This puts into practice some recommendations from the 2020 Independent Review into how the company operated. For instance, workers’ pay at factories used by Boohoo is now more transparent to ensure it meets minimum wage rules and suppliers not complying with this have had contracts terminated. The business also opened its own factory in Leicester and production started in January.
Overall, I like this company. It has a strong and consistent earnings record. While there have been shortcomings in the past, the firm genuinely seems to have addressed recommendations. I will be adding to my holding at the current Boohoo share price.
