Beleaguered fast-fashion retailer Boohoo Group (LSE:DEBS) — which now trades as Debenhams — has a grim history of gloomy earnings reports. However, first-half results released yesterday (27 November) received an ecstatic market response, with the Boohoo share price leaping from 12p to 22.50p as I write.
There are good reasons for optimism. Aggressive cost-cutting measures are starting to bear fruit. What’s more, the AIM-listed firm’s transition to a marketplace model across all divisions appears to be the right strategy.
But are these factors enough to sustain an enduring share price recovery amid bitter corporate governance tensions and continued revenue declines? I’m not so sure. Here’s why.
Turnaround triumphs
Let’s start with the undeniably impressive highlights. Post-tax statutory losses have almost been eradicated, falling from £126.7m to just £3.4m.
Moreover, underlying operating profit turned positive, coming in at £2m following a £9m loss in the previous period. And the balance sheet‘s also in better shape, thanks to a £32m net debt reduction to £111m. These are significant achievements.
The revival’s being driven by CEO Dan Finley’s shift to a marketplace-led model. This new framework now represents 32% of the group’s gross merchandise value – up from 19% a year earlier.
In essence, the aim is to shift the company from a traditional online retail structure, where the business holds and sells its own inventory, to a platform that connects third-party sellers with customers, like Amazon does. The board punchily describes this as “stock-lite, capital-lite, margin-rich and highly cash generative“.
With marketplace partners doubling to 20,000 in a year, growth is gathering pace. Promisingly, all five group brands — Boohoo, boohooMAN, PrettyLittleThing, Karen Millen, and Debenhams — are now marketplace-enabled with proprietary technology.
Flies in the ointment
Despite encouraging progress, I think the Boohoo share price could ultimately come under further pressure. Let’s not forget we’re still talking about a loss-making enterprise here. Worryingly, revenue declined by 23% to £297m. The company’s not out of the woods yet.
Furthermore, the group is locked in a bitter feud with its biggest shareholder. Mike Ashley’s Frasers Group owns nearly 30% of Boohoo shares. In an unorthodox move, Boohoo Group has bypassed investors by not putting a new management incentive plan to a shareholder vote. CEO Dan Finley stands to receive a whopping £150m payout if he can lift the valuation to £4.2bn.
This comes after Ashley demanded the suspension of founder and executive vice chair Mahmud Kamani from the board just a few months ago. He also opposed the Debenhams rebranding earlier this year.
As the dispute trundles on, there’s a risk this could all end in tears for Boohoo if Ashley chooses to instigate shareholder rebellions, disrupt future strategic moves, launch a hostile takeover bid, or pursue litigation. These risks shouldn’t be ignored lightly, as any Newcastle United supporter can attest to.
The bottom line
I’m pleased to see Boohoo Group taking steps in the right direction. The successful execution of key strategic goals should be commended. However, half-year earnings were hardly flawless, and acute corporate governance risks should be at the forefront of potential investors’ minds.
There’s a lot more to like about Boohoo shares today, but not enough for me to invest at present.
