Boohoo Group plc (BOO) Ordinary 1p

Boohoo’s full-year revenue declined 17% to £1.5bn, ignoring exchange rate impacts. Revenue fell across all regions, including an 18% decline in the US. Active customer numbers were down 11% to 16mn.

Underlying operating profit fell from £6.9mn to a loss of £18.0mn driven by a fall in sales and reduced prices.

Net debt increased to £95.0mn from £5.9mn of net cash. Free cash flow after tax worsened from an inflow of £30.7mn to an outflow of £63.0mn, in part due to inventory levels rising to support the opening of a US distribution centre.

The group expects to achieve positive free cash flow and deliver annual cost savings of £125mn in FY25. The group “remain confident” in its 6-8% underlying cash profit (EBITDA) margin target over the medium term.

The shares fell 5.7% in early trading.

Our view

Boohoo's full-year results were another painful read for investors. Revenue declined at high double-digit rates across all regions, including an 18% fall in the US, which is seen as the group's pathway to major growth.

Undoubtedly, it’s still a tough time for consumers with inflation putting a strain on discretionary spending. That's why it was no real surprise to see customer numbers fall last year. But with key customer performance metrics continuing to trend in the wrong direction, it doesn’t appear that Boohoo’s initiatives are having the desired impact.

Some of the issues outside of the group's direct control have started to abate - supply chains are unclogging, freight costs are falling, and overall goods cost inflation is easing. From these, Boohoo's identified more than £125mn of cost savings that it expects to deliver this financial year.

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. The group's spent heavily on increased capacity, especially abroad where there's more room for growth. International markets, in particular the US, hold the key to the group's future, but extensive investment has so far yielded weak results. If Boohoo can’t turn around its falling sales here, those extra warehouse costs will become a big problem for profits.

For those prepared to accept more risk, Boohoo's longer-term proposition shows a glimmer of hope. It has a UK-based, fast-fashion supply network. 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.

The value from acquisitions, including Debenhams, is also now coming through, with the new Marketplace offering allowing third-party sales on the Debenhams website. While the commission-only model generates less revenue, we’re supportive of Boohoo adding a higher-margin source of revenue into the mix. Multi-label offerings have fared well at other online retailers. The question now is how quickly Boohoo can build scale and increase volumes.

Overall, our concerns about Boohoo continue to mount. With key customer metrics trending in the wrong direction and losses increasing, 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.

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