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Why Boohoo’s share price has further to run after 650% gain in 3 years!

Boohoo (LSE: BOO) released an excellent set of results last week, with revenue and profit before tax up 50% and 22% respectively. But I think what really got investors excited and led to the 30% price jump was the 62% international growth. No clothing companies have yet come to dominate the online clothing space, and investors are understandably excited how quickly Boohoo is growing. It has a good opportunity to become a major brand in the global youth clothing market if it can continue to spread abroad.

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Following the surge in the price (244p at the time of writing, having traded as low as 32.5p this time three years ago!), the shares now trade on a price-to-earnings ratio (P/E) in excess of 85. While I’m not opposed to a high P/E, the company has to demonstrate that it can achieve exponential growth. Comparatively, two of my favourite online clothing retailers, Superdry and Next, trade on P/Es of around 10 and 12 by comparison, and are both still growing. The reason that investors are willing to pay more for Boohoo is how quickly it is growing and the size of the market that it can target.

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Some doubts over management

Investors new to this stock may wonder why the share price has stalled over the past year until recently, and it is at least in part because the subsidiary PrettyLittleThing is outstripping the growth of the main Boohoo brand. This has irked shareholders as the two ex-CEOs, and their families have a much larger holding of PrettyLittleThing compared to Boohoo Group overall, and this is where most of the growth is now occurring. The Boohoo brand grew 15% while PrettyLittleThing grew 132%, leaving many to wonder if there is a conflict of interest that will harm shareholders. A new CEO has now been appointed from Primark, which looks like a smart choice; however, the ex-CEOs are now in executive positions so this conflict of interest remains.

The new CEO John Lyttle has been given a target of increasing the share price by 23% over the next 5 years, and I have little doubt that he will achieve this. My main reservation is how little room for error there is with the current share price. Growth of the Boohoo brand is now slowing, and with PrettyLittleThing approaching the same size, there is a chance that it is approaching maximum market share. There is a chance that the bigger both brands get, the more they will compete with each other and growth could stall.

I think Boohoo Group is going to continue growing well over the next few years and I was considering a position before the results. There are just two problems for me: the first is obviously the valuation. This alone is not a deal-breaker, but considering the conflict of interest as well, there is just too little value so I’ll keep looking for a better opportunity.

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Robert Faulkner owns shares in Superdry. 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.

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