The Boohoo (LSE: BOO) share price has doubled over just the past two years. That’s little surprise given the online fast fashion retailer’s explosive growth. But for investors who have missed out on this share price run-up, the pertinent question is, can the company do this again?
There’s good reason to be confident that it can. Last year, group revenue increased a whopping 97% to £579m, due to strong 29% constant currency sales growth from the core Boohoo brand and full acquisition of the US brand PrettyLittleThing.
But with this level of growth now routine in the eyes of investors, there’s a significant amount of future expansion already baked into the group’s valuation of 47 times forward earnings. So this means there’s going to need to be unexpected positive catalysts to see Boohoo’s share price double again in the short term.
One possible avenue for this is an unexpected uptick in sales from management’s current guidance of 35-40% sales growth. This is possible, but would require either overseas growth to jump substantially from the 65%+ growth posted last year or for new brands to prove immensely popular.
Or, if recent big investments in the physical infrastructure that underpins future sales growth come in cheaper, or more efficient than expected, investors would likely react favourably as adjusted EBITDA margins would reverse the dip they took from 12.1% in FY17 to 9.8% in FY18.
Management has already set relatively low expectations for full-year EBITDA margins of 9-10% this year. So even a marginal uptick in profitability, without being seen to sacrifice much-needed investments, would offer upside potential.
Boohoo has certainly gone from strength to strength in recent years and proved the bears such as myself wrong. However, with the online fast fashion sector offering low barriers to entry for competitors, relatively low margins, and the constant potential for young consumers to shift allegiance to another brand, Boohoo is still one richly-valued stock I’m steering clear of.
A more down-to-earth investment
I’m much more interested in thread supplier Coats (LSE: COA), whose share price has returned 143% over the past five years – not far behind Boohoo’s 172% return over the same timeframe. On one hand, Coats suffers from some of the same problems I have with Boohoo. After all, for clothing makers, thread is just another input where cost is normally the primary concern.
But Coats has turned itself into more than just a low margin, bulk thread supplier in recent years. It now produces a growing percentage of sales from higher value-added threads made from a variety of materials for end uses ranging from fire-proof clothing to telecommunications cables. And now management has set its sights on a potentially transformative market, namely composite threads that use materials like carbon fibre to make stronger, lighter products for use in automotive or industrial settings.
Interim results covering the six months to June suggest the company will stay in investors’ good graces as constant currency sales bumped up 5% to $788m, while adjusted operating margins increased from 12% to 12.7%. With plenty of opportunities to further boost profitability, market share gains are expected to build, and with huge end-markets to tap, I reckon Coats could turn into a very nice long-term holding. And, at under 14 times forward earnings, while kicking off a growing 1.35% dividend yield, I find it attractively-priced to boot.
Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. 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.