Fast-fashion retailer Boohoo (BOO:AIM) has shrugged off the negative publicity from its Leicester supply chain scandal to deliver forecast-beating first-half results showing no slowdown between the first and second quarters.

The online retailer also raised sales growth and adjusted earnings before interest, taxation, depreciation and amortisation guidance (EBITDA) margin guidance for the 2021 financial year, although the shares softened 2.6% to 380p as Boohoo flagged higher costs to come and sounded a note of caution on the outlook for consumer spending.

YET ANOTHER UPGRADE

Results for the six months to 31 August showed a 45% group sales surge to £816.5 million, smashing the £773 million called for by consensus thanks to progress across all brands and geographies.

And despite the adverse publicity arising from its supply chain issues in Leicester, there has been no impact on consumer appetite for its brands, which include the eponymous Boohoo label, PrettyLittleThing and NastyGal, not to mention newer brands it is integrating into its platform (Miss Pap, Karen Millen, Coast, Warehouse and Oasis).

Buoyed by the strong half, and sitting on £345 million of net cash thanks to strong free cash flow generation and a recent £200 million placing, Boohoo raised smiles by upgrading guidance for the year to 28 February 2021.

It now expects to generate revenue growth of between 28% and 32%, up from 25% previously, with an adjusted EBITDA margin of ‘around 10%’, nudged up from the previous 9.5%-to-10% range.

While Boohoo highlighted a ‘good start to the second half of the year, with momentum continuing into September’, management feel it is ‘prudent to continue to plan for a period of economic uncertainty in the second half of the financial year, including possible reduced consumer spending’.

Medium-term guidance for 25% sales growth per year and a 10% adjusted EBITDA was left unchanged.

Shares in Boohoo rallied on publication (25 Sep) of the results of an Independent Review into its UK supply chain triggered by modern slavery allegations which emerged this summer. Investors were relieved as the probe concluded Boohoo did not deliberately allow poor conditions and low pay to exist within its supply chain.

While the report identified ‘significant and clearly unacceptable issues’ in the retailer’s supply chain, it stated that the company had already taken the steps to remedy problems in its Leicester supply chain nearly a year ago.

Chief executive John Lyttle insisted Boohoo has ‘established a programme to implement the recommendations of the report to make substantive, long-lasting and meaningful change that all stakeholders in the boohoo group will benefit from’.

THE EXPERTS’ VIEW

Shore Capital reiterated its ‘sell’ rating on Boohoo, despite the current momentum in the business, seeing ‘potential pressure on gross margins and rising central costs following the company’s admission that it needs to change its approach to the Leicester textile industry. We look for further clarity on potential wider investigations by other authorities before giving the company a clean bill of health.’

Russ Mould, investment director at AJ Bell, pointed out there are ‘some notable headwinds to consider, all of which will push up costs. Customers returning fewer clothes helped boost the gross margin but Boohoo is now guiding for return rates to drift back to historic levels. Delivery costs have become more expensive for overseas markets and marketing spend is going up. The retailer will spend more on improving operations and IT.

‘If that wasn’t enough, there are the extra costs relating to actions from the recent review of its supply chain. Boohoo has pledged to improve its governance and be more focused on supply chain compliance, all of which will cost time and money.’

Mould added: ‘Boohoo has been under attack for some time by short seller ShadowFall which has now come out with more questions about the company’s actions. For example, it wants to know the value of the claim being pursued by a class action lawsuit in the US relating to alleged “false and deceptive” advertising practices, and whether investors were made aware of the legal claim ahead of the £198 million share placing in May.’

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Issue Date: 30 Sep 2020