Boohoo was founded by clothing veterans Mahmud Kamani and Carol Kane back in 2006 and has since grown into one of the UK’s largest online clothing retailers. Boohoo differentiates itself from it rivals by only selling own branded items. The fact that everything is own branded has allowed them to keep prices low and at the same time achieve high gross margins. These high gross margins has provided them with the resources to invest heavily in marketing, this winning formula has lead to revenue growth on a scale which most companies can only dream of. Boohoo floated in 2014, revenue that year came in £110 million fast forward to 2018 and revenue has risen five fold to £580 million giving an impressive Compound Annual Growth Rate of 52%.
The shares listed in March 2014 at 50p on it’s first morning of trading the shares rallied 70% hitting 85p, clearly investors saw the potential of what Boohoo could achieve. As it turned out investors were getting a little ahead of themselves, a trading update in January 2015 resulted in the shares crashing down to 22p as the company reported that profit would be below expectations. That profit warning turned out to be just a minor blip in Boohoo’s growth story and investors who were brave enough to take the plunge after the drop have been rewarded handsomely. The shares rose steadily from there peaking as high as 266p in June 2017. Since then though the shares have been volatile and currently trade at 175p as investors locked in profits and concerns have arisen that the companies stunning sales growth might have matured.
Boohoo is approaching the end of H1 financial year 2019 and is due to announce interim results on the 26th September. In Q1 Boohoo reported impressive revenue growth of 53% but the vast majority of this growth came from PrettyLittleThing. PrettyLittleThing was founded by Mahmud Kamani’s son Umar Kamani and was purchased by Boohoo in 2016 an astute purchase considering the fact PrettyLittleThing racked up revenue of £79 million in Q1 up 158% over the previous year. In terms of revenue PrettyLittleThing isn’t that far behind Boohoo’s now with Boohoo’s Q1 revenue coming in at £97 million. Boohoo’s own revenue growth has slowed substantially with Q1’s revenue only up 12% over the prior year. With PrettyLittleThing now being the main growth driver behind the group it’s a good job management made the purchase back in 2016, without it the shares would certainly be trading substantially lower than current levels. The final brand in the Boohoo group is NastyGal which was purchased in 2017 for $20 million. Whilst NastyGal is currently a small contributor to the overall group with Q1 revenue coming in at £7 million it’s experiencing growth rates higher than PrettyLittleThing’s and will play an important role within the group in the coming years.
Looking forward analyst’s expect growth in Q2 to be materially lower than Q1, PrettyLittleThing is currently moving it’s warehouse from Burnley to Sheffield and the resulting disruption is expected to roughly halve PrettyLittleThing’s growth rate down to around 70%. In contrast to PrettyLittleThing Boohoo’s growth rate is expected to rebound back up to 20% driven by range development, favourable weather and investment in service and marketing, including several exciting new campaigns. Overall Q2 revenue growth is forecast to come in at 39% down from Q1’s 53% resulting in an overall H1 growth of 45.5%. Whilst the drop off in growth through Q2 may cause some concerns for investors the outlook for the rest of the year should ease these concerns as revenue is expected re accelerate and with margins also set to expand we can expect a strong outlook on both earnings and revenue for the full year.
With earnings per share of 4p forecast for 2019 the shares certainly aren’t cheap with them currently trading on a forward p/e ratio of 44, but if we look ahead to 2020 it drops to 35 as 5p of earnings are forecast. Once you take into consideration Boohoo’s stunning growth rates and the potential that still exists for further growth particularly in the US, the shares deserve the high p/e ratio. The shares are certainly worth considering for the long term if you can stomach the volatility and the risk that comes with growth shares. One thing to bear in mind is that growth shares with high p/e ratios such as Boohoo can be punished heavily on single trading updates if growth has slowed.