The Boohoo Group (LSE: BOO) share price motored ahead on Wednesday after the firm said pre-tax profit rose by 38% to £59.9m last year.
The fast fashion group has been a stunning success for investors — the shares have risen by nearly 400% over the last three years. But can this momentum continue? I’m not so sure.
Today I want to explain my view on Boohoo and suggest a FTSE 100 growth stock I’d consider instead.
I normally see family ownership of listed businesses as an attraction for stock market investors. As a general rule, I believe that such owners tend to have a long-term, conservative focus that helps to avoid mishaps and provide reliable shareholder returns.
Boohoo certainly ticks the boxes here. Co-founders Mahmud Kamani and Carol Kane control more than 20% of the group’s shares. Other members of Mr Kamani’s family appear to own a further 17.1% of BOO stock.
However, I’m less keen on the ownership structure of Boohoo’s star brand PrettyLittleThing. Sales at this young fashion brand rose by 107% to £374m last year. This meteoric growth means that PrettyLittleThing now rivals core Brand boohoo, where sales rose by just 16% to £435m.
I don’t know why Boohoo is growing so slowly compared to PrettyLittleThing.
But I do know that PrettyLittleThing was founded by Umar and Adam Kamani, the sons of Boohoo co-founder Mahmud Kamani. When Boohoo acquired PrettyLittleThing in 2017, it only took a 66% stake. The remaining 34% of PrettyLittleThing is held by other investors, presumably the original founders.
Why this matters
Boohoo Group’s after-tax profit for 2018/19 was £47.4m. But BOO shareholders are only entitled to £37.7m of this income. The remaining £9.7m goes to outside shareholders in Boohoo’s subsidiaries. I suspect that most of this relates to PrettyLittleThing.
What this means is that more than 20% of Boohoo’s profits went to outside investors last year. Earnings for Boohoo shareholders only rose by 19% to 3.22p per share. With the shares trading above 230p, that prices the stock at roughly 70 times earnings.
This valuation is too high for me, especially as shareholders aren’t getting the full benefit of strong growth at PrettyLittleThing. I’d avoid the shares at this level.
Since its flotation in 2015, shares in Auto Trader Group (LSE: AUTO) have doubled. This growth has propelled the group into the FTSE 100, where it’s become known as the Rightmove of the motoring industry.
It seems a fair comparison. Auto Trader’s website gets four times more visits than its nearest competitor. This dominant share of the market means that it has a lot of pricing power. The group’s operating profit margin was 67% last year.
What could go wrong?
There is a risk that a slowdown in the UK car market could result in falling numbers of used car listings and perhaps a reduction in pricing power. Increased competition is also a risk. However, given the group’s dominant market share, I suspect dealers will continue to find it essential to list their stock on Auto Trader.
The shares seem expensive, on 29 times 2019 forecast earnings. But I think the firm’s high profit margins and dominant market share mean that it’s probably priced fairly at current levels. In my view, Auto Trader remains a long-term buy.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader, boohoo group, and Rightmove. 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.