Well, Boohoo.Com (LSE: BOO) has certainly already minted a handful of millionaires as co-founders and co-CEOs Carol Kane and Mahmud Kamani still hold roughly 4% and 16% of outstanding shares, together worth a combined £450m at today’s share price. But is it too late for retail investors to replicate the explosive growth Boohoo’s shares have exhibited over the past three years?
Perhaps not. Although the company’s sales have been rising at astronomical rates there doesn’t appear to be any slowdown in sight. Results for the half year to August showed group sales rising 106% to £262.9m with its largest market by far, the UK, also doubling sales during the period.
And management seems convinced there is plenty of growth to come as this summer it completed a £50m rights issue to raise capital for an expanded warehouse site. This new site will support £2bn of sales capacity in addition to its existing warehouse that has space to process up to £1bn in sales. The new location won’t be up and running until 2020 and will cost some £150m, but it’s good to see such a strong sign of optimism from a management team where insiders have such a personal interest in its shares’ success.
Yet there remain several significant roadblocks that will keep me from buying the company’s shares. For one, their lofty valuation of over 80 times forward earnings has already priced in large amounts of future growth. Second, I remain unconvinced by the long-term stability of online fast fashion retailers. Young people are fickle customers and what’s popular this year may not be in five years’ time.
Furthermore, the firm’s profits are relatively low compared to high street rivals like Zara owner Inditex, albeit by choice with investments made in expansion. That said, if Boohoo continues to need to sink millions into bringing in new customers, margins could stay depressed indefinitely and the stock’s current valuation could prove overly optimistic. Either way, I’ll be investing my money elsewhere in hopes of bagging a millionaire-maker stock.
Revenge of the nerds
Another stock that’s likely created a few millionaires is builder of fantasy worlds and toys, Games Workshop (LSE: GAW). The firm’s stock price has risen over 300% in the past year alone and the company’s market cap has increased to over £700m.
This stellar performance is grounded in very concrete operational excellence as revenue in the year to May rose a full 33% to £158m, while operating profits more than doubled to £38m. The key to the company’s success has been refocusing on its core product in order to attract new customers and rebuild relationships with dedicated hobbyists. This has worked well so far and annual sales from each of its channels increased by at least 20% with royalty payments from video games and the positive effects of the weak pound accounting for the rest of top-line growth.
Looking ahead, Games Workshop is unlikely to deliver this level of astounding growth indefinitely, in fact that conservative management team makes that quite clear in all its reports. But the fact that management isn’t chasing growth at all costs bodes well for the company’s long-term prospects. And with its shares priced at only 16.5 times forward earnings while offering a 3.2% yield, Games Workshop is much more to my liking.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo.com. 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.