Shares in fast fashion retailer Boohoo Group (LSE: BOO) took a step back when the company issued its trading statement for the vital Christmas period earlier this week.
As my Foolish colleague Paul Summers noted at the time, the company reported a year-on-year increase in revenues of 44%, and more importantly, a gross margin of 54.2% up 1.7%.
The fact that Boohoo’s margins are growing is highly impressive, especially when, only a few weeks ago, its peer Asos warned that its margins would decline in 2019 and investors rewarded the company by dragging its share price down 40%.
Off the back of this robust Christmas trading, management now believes AIM-listed Boohoo will see revenue growth for the full year of 43% to 45%, higher than the previously expected 38% to 43%.
These numbers are all impressive, but the market didn’t reward the company for its growth. Instead, the stock was marked down by nearly 10% on the day of the release.
The shares have since recovered some lost ground, although they are still off around 14 points from before the trading update. Is this decline worth taking advantage of?
The market is not buying it
Boohoo’s headline growth numbers might look impressive, but they don’t tell the whole story. For example, sales at the Pretty Little Thing fashion brand roughly doubled year-on-year. However, sales at the group’s largest division, Boohoo itself, only rose 15%, below the 18% analysts had been predicting.
Boohoo has been investing heavily in promoting its Pretty Little Thing brand since it was acquired at the end of 2016, and the numbers seem to suggest that this heavy investment is having an impact on Boohoo’s flagship brand. That being said, margin expansion indicates management is investing in the right business, so I’m not too worried about Boohoo’s slowing growth right now.
What I am concerned about, however, is valuation. The stock is changing hands at a forward P/E of 47, which is easy to justify with earnings expected to expand by 43% for fiscal 2019. City analysts have not yet had a chance to update their forecasts following the upbeat trading update earlier this week, so I think these estimates understate Boohoo’s potential. But the valuation becomes harder to justify with growth slowing.
If it starts to suffer a decline in demand for its products, investors may start to panic and with such a high valuation currently placed on the stock, the resulting share price decline could be significant.
Still, as of yet, it doesn’t look as if there is any major slowdown on the horizon for the firm. The problem is, when slowdowns do emerge, they tend to catch investors by surprise (as investors in Asos know only too well). With this being the case, I’m not a buyer of the Boohoo share price today, I think that there are plenty of other investments out there with the potential to generate returns without taking on excessive risk.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended boohoo group. The Motley Fool UK owns shares of and has recommended ASOS. 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.