Fast-fashion online retailer Boohoo.Com‘s (LSE: BOO) storming performance since January 2015 – over which time its stock has ten-bagged in price – has won it legions of international fans. Based on today’s interim numbers, I suspect it might be worth holding on to the shares for a while longer.
Revenue rockets
The figures really speak for themselves. Revenue soared 106% over the six months to the end of August with adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) coming in just short of £28m – a 68% rise compared to the same period in 2016. A 2% reduction in gross margin (to 53.3%) was justified through planned investments in IT and warehousing as part of the company’s growth strategy.
As a result of sales rocketing 289% on the prior year to £72.7m, PrettyLittleThing was the standout performer of the company’s three brands. In addition to exceeding their expectations, joint CEOs Mahmud Kamani and Carol Kane stated that cracking international sales had confirmed the brand’s “considerable potential“. Revenue from boohoo and the recently integrated Nasty Gal hit £181.8m and £8.4m, respectively.
Perhaps the most significant news, however, was the raising of guidance on revenue growth for the full year (to around 80% from 60%). Factor in the firm’s excellent progress overseas (handy as we approach Brexit), a cash position of almost £120m, and a clear advantage when it comes to marketing/social media proficiency, it seems logical to assume that boohoo’s shares will resume their march north.
Overall, I remain bullish, despite the altitude sickness-inducing valuation of 88 times forecast earnings and the fact that, with a market capitalisation already approaching £3bn, a slowing of growth at some point is inevitable. While it makes sense for holders to bank at least some profit at some point (which could be just one of the reasons for today’s 9% sell-off in early trading), I think boohoo remains a quality firm that could still make investors considerably richer.
Questions remain
I’d certainly back boohoo over newly-listed, Glasgow-based clothing retailer Quiz (LSE: QUIZ), despite the latter appearing to have a lot going for it.
In addition to using the same test and repeat model operated by the former – making small quantities of a wide variety of clothes before ramping up production of the best sellers – the £222m cap possesses a 300-strong estate of standalone stores and concessions on relatively short leases. That means it can target high street shoppers in addition to those who prefer to buy online.
Operating margins and returns on capital are more than decent. Valuation-wise, shares in Quiz are also far cheaper than those of boohoo (albeit still very expensive at 28 times forecast earnings).
That said, I don’t think Quiz has all the answers. The company’s online presence is a lot smaller than that of its larger peer and a huge marketing spend will be required to ensure it remains competitive. There’s also the fact that many of the company’s concessions can be found in Debenhams (whose stores aren’t exactly bursting at the seams with customers right now). What’s more, there’s nothing to stop boohoo building a physical presence if it really needed to.
Given that its stock has already fallen 10% in price from the peak of 198p achieved back in August, prospective investors might be wise to delay purchasing shares in Quiz until after the company releases a pre-close trading update on 11 October.
