Boohoo Booms But Can it Last?

The Week: Morningstar columnist Rodney Hobson says the key to Boohoo's future depends on the struggling retailers it has rescued

Rodney Hobson 17 January, 2020 | 9:40AM
Facebook Twitter LinkedIn

Stock market chart

Christmas can be a lonely period, not least if you are a retailer with an empty shop. As trading updates come in covering what should be, for the sector, the most wonderful time of the year, it is once again clear that experiences have varied considerably. Investors should obviously take note.

One of the best performers is Boohoo (BOO), which continues to grow total revenue by 44% year on year. It rode out the Brexit uncertainty to increase UK sales by 42% in the final four months of 2019, a step up from earlier in the year. The rest of Europe and the US eased back a little towards the end but still motored 57% ahead. Only the rest of the world disappointed with sales growing 13% in the latest period, though most retailers would be delighted with that sort of progress.

Chief executive John Lyttle has been able to revise upwards revenue expectations for the full year to the end of February, from 33-38% growth to 40-42%. Margins have admittedly slipped a little, so the rise in sales will not translate into quite such a good rise in profits, but at least the balance sheet is strong, with cash balances having risen from £207 million at the end of August to £245 million.

Much now depends on the struggling retailers that Boohoo has rescued. MissPap, Karen Millen and Coast are “showing great promise” and open different target markets for the group. Lyttle says they have been fully integrated and relaunched. I hope he is right, but the magic of the core business doesn’t always rub off onto acquisitions.

Boohoo shares have more than doubled from 150p to around 320p in less than two years. There is no immediate reason for shareholders to cash in yet. But it is worth bearing in mind that others who sell to the general public have flown high then suddenly fallen out of favour for no obvious reason. If you’re in, be alert.

More Questions Than Answers

Whatever question you may care to ask, the answer is not Quiz (QUIZ). The “omni-channel fashion brand” has been affected by a decision to stop selling through unprofitable third-party websites, which is fair enough, but even allowing for that factor sales have been poor since Black Friday, which came just before the last, more optimistic, update.

Revenue decreased by 9.3% in the key seven weeks to January 4. Since much of the blame is placed squarely on the remaining website partners, one wonders if more of them will be sacrificed, leading to yet another fall in revenue. Meanwhile, Quiz’s own stores and concessions are suffering from a decline in footfall, leading to sales dropping 7%.

Margins have improved and costs have reduced, so management claims profits will still be in line with expectations. I’m not convinced, and nor were the investors who drove the shares down 17% to a mere 15.5p.

Quiz has not only joined the 90% club, the small band of companies that have lost more than 90% of their stock market value, it has done so in the remarkably short space of less than three years. Stay well clear.

No Idling for DFS Investors

Somewhere in the middle is furniture retailer DFS Furniture (DFS), which doesn’t worry about making full-price sales because it continuously offers goods at heavy discounts. Sales were down 6% in the 26 weeks to December 29 against strong comparatives a year earlier but the redeeming feature is that the slowdown came in August and September while the next four months saw a pick-up. Profits for the full year to the end of next June will meet expectations if the recent momentum in orders continues.

DFS shares have slipped back a little after staging their own remarkable Santa Claus rally. They have bounced up and down wildly over the past five years, going broadly sideways, and that is likely to continue. One for the active investor only.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Boohoo Group PLC110.43 GBX1.17
DFS Furniture PLC258.12 GBX0.83
QUIZ PLC16.41 GBX-2.01

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.