Boohoo has conditionally raised £39.3mn through the issuance of new shares at a price of 31p. The transaction is expected to close on 26 November. The proceeds will be used to pay down its debt.
The intention to raise funds was announced alongside half-year results. Revenue fell 15% to £620mn over the period as its Youth Brands and Debenhams & Labels divisions both posted declines. The Karen Millen division squeezed out marginal growth.
Underlying operating losses widened from £3.9mn to £18.3mn. This was driven by a weakening gross margin as promotional activity increased due to soft consumer demand.
Free cash outflows widened from £13.3mn to £35.4mn. Net debt, including lease liabilities, rose from £162.1mn to £257.5mn.
Over the second half of the year, the group expects gross merchandise volumes and cash profits (EBITDA) to increase versus the first half.
As of this morning, the shares were trading broadly flat compared to the level seen before news of the results and fundraise broke.
Our view
Boohoo’s first-half results were a painful read, with sales and profits both moving in the wrong direction. The group’s announced a nearly £40mn equity raise to help shore up the balance sheet while the newly minted boss, Dan Finley, figures out how to turn the ship around.
The group’s still considering ways to restructure the business to unlock value for shareholders. The main option being considered is spinning off one or more of its core divisions. But we’re not convinced that’s the answer. Breathing life back into its young fashion brands (PrettyLittleThing, boohoo, boohooMAN) should be the main focus in our eyes. Improvements here would be far more likely to move the dial.
In terms of actual business performance, customer numbers continued to fall. With key customer performance metrics trending in the wrong direction too, it doesn’t appear that Boohoo’s initiatives are having the desired impact.
To help stem the bleeding, Boohoo’s trimming a lot of costs. Admin, distribution and marketing spending were all down at double-digit rates, meaning the group’s already eclipsed its £125mn annual cost savings target, with more lined up for the second half.
But these savings are being reinvested into keeping prices low, which is the core identity of the brand. While we commend the intention behind this, it's hurting the profitability. Unless Boohoo regains control over falling customer numbers and volumes, it's going to be very hard to drive revenue and profits back in the right direction.
There are also Boohoo-specific problems. After investing heavily in expanding into the US and setting up a distribution network there, the plug has been pulled. US customers will now be served from a warehouse in Sheffield, meaning delivery times and costs are likely to be hefty, which we don’t think will be good for sales in the region.
For those prepared to accept more risk, Boohoo's longer-term proposition shows a glimmer of hope. Its model allows it to react to changing trends and demand levels extremely quickly, ultimately helping sales and margins when volumes are in full flow. This is what keeps prices so low - it's a unique selling point. Continually nailing its proposition and bringing customers back to its site is what’s needed, but it’s a tough ask in a competitive market.
Overall, our concerns about Boohoo haven’t disappeared. With key customer metrics and profits trending in the wrong direction, major challenges lie ahead. This has been reflected in the group's valuation, which has come down significantly over the last few years. With so much uncertainty ahead, investors should expect a bumpy ride.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Boohoo’s management of ESG risk is average.
The company's disclosure is poor, signalling inadequate accountability to investors and the public. It has some initiatives to manage risks related to material ESG issues, however, the company lacks policies and programmes in key areas. Furthermore, the company has been involved in numerous significant ESG-related controversies.
Boohoo key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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