Why We're Long on Boohoo Group PLC

Introduction

In this report, we will give an overview of Boohoo Group PLC and explain why we believe it is a great long-term investment. We will highlight key market trends, such as the growth of the online fashion industry and the decline of high street fashion. While we dive into Boohoo’s strong financials, we will identify the causes for the potential growth in revenue, going through fundamentals and technical analysis.

Alongside Boohoo’s large social media presence and many profitable high growth subsidiaries, we take into consideration the recent scandal that has rocked the share price and led us to believe the stock is currently undervalued.

Company Overview

Boohoo Group PLC is an online fashion retailer founded in 2006. As of 2019 the company has 2300 employees and is the parent company to many high growth subsidiaries such as Nasty Gal, PrettyLittleThing and Misspap. Boohoo Group PLC has over 36,000 products including various clothing lines and is aimed at the age category 16-30.

Boohoo’s current share price is at 271.6 and has a market capitalization of 3.43bn which makes it a Mid Cap stock.

Boohoo Group PLC Highlights

The chart taken from the Bloomberg Terminal, shows Boohoo’s forecasted annual earnings are expected to grow 26.7% in the next 1 to 3 years, based on estimates from 19 analysts. The chart also highlights a strong trend of continued growth in line with analysts’ estimates, leading us to be confident that this trend will increase.

A contributing factor to this increase in earnings is the emergence of PrettyLittleThing, a UK-based fashion retailer, aimed at 16-24-year-old women, which is owned by Boohoo Group PLC after an acquisition in May 2020.

As the data above shows, PrettyLittleThing’s revenue has increased 4469.02% over four years and we expect this dramatic increase in revenue to continue. They are one of the largest online retailers aimed at the younger generations of women and give Boohoo a considerable market share when paired with the already established Boohoo Man brand. If this growth continues then Boohoo Group PLC could take the majority of the market share in the age 16-30 demographic. We see PrettyLittleThing as an undervalued brand of Boohoo Group PLC, that we expect to drive profitability for years to come and the acquisition of PrettyLittleThing will aid Boohoo’s attempt to break into America, a massive market that can cause revenue growth to increase over a short period of time.

In America, Boohoo’s revenue over the last 4 years (ending in February 2020) has increased 552.48%. The US percentage share of total revenue has increased steadily over the years, showing a clear indication of trending growth in this market.

Underpinning all of this incredible growth is a very strong social media presence. They have over 20 million combined Instagram followers, giving them a fantastic reach when it comes to advertising. Social media is continually growing and with Instagram already having over a billion users, the potential for increased brand recognition is exponential.

The main scepticism around Boohoo’s share price is due to PwC quitting as their auditor. This is due to PwC trying to maintain their brand image as Boohoo was embroiled in a scandal in paying less than the minimum wage to employees who were producing their clothes. However, Boohoo denied the accusations and claimed they were unaware as the employees in question were sub-contracted and not employees of Boohoo. While we were concerned about this controversy, we see this as an opportunity for increased profit margins as production is now seeking to move abroad, with Turkey and Morocco heavily speculated for the new factory locations. Boohoo can capitalize on the move, due to the short lead time Morocco offers on European orders and is especially attractive for high-fashion items which depend on short cycles and flexible capacities. There is still remaining pressure, as speculation is mounting over the identity of PwC’s successor. 

It is imperative to gain a cumulative view from Boohoo’s perspective and establishing further insight into whether they can move past this controversy. Looking at director dealing, it's interesting to note that three top-level Boohoo directors purchased stock when share prices fell. We see this as a sign they are confident about the future.

• Founder and Executive Chairman Mahmud Kamani purchased 300,00 shares at ￡2.43 per share.
• CFO Neil Catto, purchased 5,825 shares at ￡2.57 per share.
• Deputy Chairman Brian Small, purchased 10,000 shares at ￡2.50 per share.

This director dealing is a clear bullish indicator as all three are top-tier insiders, who most likely have advantageous information over the general investor. This suggests Boohoo’s shares are on the way to recovery and they are confident in long term growth.

Financial Overview

• Retail Apparel Industry: Average P/E Ratio 29.42
• Boohoo Group PLC P/E Ratio: 40.49 (Relatively high)
• Boohoo Group PLC PEG Ratio: 1.5 (Slightly Overvalued)

Boohoo Group’s P/E tells us that markets participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, however, it's important to note, this doesn’t guarantee future growth and that the rate of earnings growth does have a large impact on a company’s P/E multiple. Therefore, if earnings grow quickly, then the ‘E’ in the equation will also grow at a substantial rate.

So how does this correlate with Boohoo? Last year, Boohoo Group PLC increased earnings by a huge 49% and their earnings per share has improved to 41% annually over the last 5 years. Boohoo also grew revenues (YOY) 44.11% from 856.92m to 1.23bn, while net income improved 46.08% from 43.58m to 63.67m. A company that is expected to grow earnings in the coming years are also able to ‘command’ a higher share price and thus, a higher P/E ratio. No doubt justifying their relatively high P/E ratio.

A PEG ratio greater than 1 is usually considered overvalued, as it might indicate the stock price is too high compared to the company’s expected earnings growth. Factoring in the growth rate of the company is also crucial to know whether it is reasonably valued. Although Boohoo has a relatively high PEG ratio of 1.5, it is considerably low compared to their main competitors. One of which is ASOS, with a PEG ratio of 2.7, and Topman, with a PEG ratio of 6.8.

Although PEG can be incredibly useful, it must be clear that it is not a magical ratio that points out shares we must all buy. If it was, everyone would be using it and buying low-PEG shares, which pushes prices up, and therefore raising the P/E and PEG, thus eliminating all low-PEG companies.

Return on Equity

ROE serves as an efficient profit-generating gauge for a company’s future earnings and depending on how much of these profit Boohoo reinvests, we can then assess its earnings growth potential. Boohoo’s ROE of 21.8% is also considerably higher than the industry average, which stands at 14%. This has resulted in a 36% net income growth over the past five years and when we compare this to the industry net income growth of 11%, it is no doubt something we like to see.

Financial Position

Further evidence to solidify the company's’ strength can be seen looking into Boohoo’s financial positions. We can see their short-term assets of ￡551.0M, exceeds its short-term liabilities of ￡334.1M and their short-term assets of ￡551.0M, exceeds its long-term liabilities of ￡17.20M.

It is worth mentioning Boohoo are completely debt-free, meaning it does not need to be covered by their operating cash flow and coverage of interest payments is not a concern.

Technical Analysis

From a technical analysis standpoint, it's important to note the clear uptrend projection outlined by the blue trend line on the chart above. Price action has respected the trend line three times in past; therefore, it would be reasonable to suggest it may continue to do so. A break below will indicate loss of trader confidence and force the price lower. It is our analysis that price will continue to respect the current channel and continue its path to the upside, on its way to possibly retest 400.0.

Hourly Time Frame (Early Indication)

Monthly Time Frame (Long Term Indication)

Price action is currently respecting a support zone established back in 2017, which was again respected in 2018 and 2019 as resistance, before finally pushing to the upside. Our projection is that price will continue to respect this support, as evidenced by already doing so twice, once in July and once again in this current month of November.

Market Overview

The fashion industry is a necessity, as clothing is essential for all and has grown 11% in 2018-2019, now worth 223 billion US$.

Due to the coronavirus pandemic, many companies in the UK have been struggling. For the fast-fashion brand, Boohoo Group PLC, has benefited much more than others because the pandemic has expedited the switch from sales from in-store to online. 33% of total sales in Great Britain were made online in 2020, compared to just 19% in June 2019.

High street fashion companies have a smaller online presence compared to technology thriving companies like Boohoo and ASOS. An example of this is Primark who, according to Retail Gazette, have ￡1.5 billion worth of clothes currently in stockpile with no ability to sell anything. While Boohoo, with its online-only offering, saw online sales rise by 45% in the three months to May 2020.

Boohoo’s share price ‘dipped’ with the rest of the stock market post-lockdown, but it’s one of the only FTSE companies to have done well since. Boohoo hasn't just recovered - it’s now in a better position than it was in throughout the previous fiscal year. So, going into another lockdown we can assume it will drive sales higher.

Competitors

We determined that ASOS was the most direct competitor to Boohoo due to being in the same sector (online fashion) and having a similar market cap, Boohoo’s 3.24 billion compared to ASOS’s 4.4 billion. This chart demonstrates that ASOS has performed strongly over recent years, with revenue gradually increasing year on year, highlighting the strength of the online retail sector.

When we compared the PEG ratio, ASOS was significantly overvalued with a value of 2.7 compared to Boohoo’s 1.5 PEG ratio. Indicating that Boohoo is a better investment at this current time, as it is valued more fairly while gaining increased revenue each year. This was confirmed by looking through the FT peer analysis tool which shows that Boohoo’s 5-year average net profit margin is 2.25 times higher than the value for ASOS.

H&M

H&M is considered a key player in the retail industry with over five thousand stores worldwide and operating in 74 countries. As Boohoo is based solely online, H&M are not a direct competitor but gave us an interesting insight into one of the key reasons why we’re long on Boohoo. High street retailers are slowly dying due to the growth of online shopping.

A 12.15% decrease in revenue over 3 years compared to Boohoo’s 190.84% increase (2017-2019 time frame) highlights the shift from traditional retailers to online alternatives. This was also demonstrated earlier this year by Primark, another large traditional retailer, losing massive revenues as Boohoo’s increased exponentially. While traditional retail are still far ahead of online competitors, as indicated by H&M’s 239 billion market cap, compared to Boohoo’s 3.24 billion, all current signs point to a dramatic change in how consumers spend their money.

Market sentiment

Boohoo Group PLC was upgraded to ‘neutral’ from ‘underperform’ by Credit Suisse after anticipating ‘balanced’ news in the near future, after the governance scandal earlier this year. The company was also heavily criticised in the latest review of its working practices by Alison Levitt QC. However, promises to implement new measures to improve its performance is leading the Swiss bank to see a significant risk in adopting report recommendations. Analysts also think the risk to reward is now more balanced after Boohoo confirming PwC is no longer their auditor.

Looking into the fundamentals alone, it's easy to acknowledge why big investors in the company, such as Jupiter Asset Management and Baillie Gifford are staying with the company. Currently, it is trading on a valuation of 33 times 2021’ estimated earnings. Profits also rose by 51 per cent in the first half of the year and the valuation is a discount to rival ASOS, which trades on a multiple of 42 times. Due to this, we believe that Boohoo’s share price does not reflect the true value of the company.

Conclusion

To conclude, we believe that a long-term investment in Boohoo Group PLC will yield strong results. This is because earnings are showing a clear upward trend, leading to a higher market share which has been increased significantly by the recent acquisition of PrettyLittleThing. Although a UK based company, a growing presence in America is likely, due to their large social media campaigns and expanding brand. Furthermore, analysis into director dealings highlights company confidence in future profitability. Their confidence is likely due to the fashion industry growing and the fact that Boohoo Group PLC has shown strong resilience to the current pandemic. Although P/E and PEG ratios are slightly overvalued, we believe these fundamentals are justified due to promising results on the return of equity; financial positioning which indicates company strength, and promising market sentiment. 

The accumulation of this analysis has resulted in our recommendation that an investment in Boohoo Group PLC will bring strong results in the long term.

Entry & Exit Price

Entry

Our entry price is 260.0. This area of support has been respected numerous times in the past and correlates with an ascending trend line. Ideally, we would like the entry price to be around 200.0 – 220.0, however, the issues the company has faced is showing good signs of recovery and it is unlikely to break lower.

Stop Loss

Our recommended stop loss is at 215.0. This allows room to ‘breath’ as investors may continue to test this area before pushing the price to the upside. Is it also under two points of rejection, one fairly recently this October and the other in July. At this time, although the company may run into sustainability issues in the future due to the movement of suppliers abroad, it is reasonable to suggest this area will be respected.

Profit Taking

Our recommended area of profit taking is 400.0. Technical and fundamental analysis shows a clear bounce between 200 and 400. Boohoo Group PLC is estimated to gain sales through the Christmas period, thus anticipating an impressive earning release in April 2021. Another reason for our exit is due to the move of suppliers from Leicester to Morocco and Turkey. It is not unreasonable to suggest the sustainability and quality of merchandise may take a hit and there is no evidence yet, to suggest a break above.

As the trade begins to take our anticipated route, once a price has broken through 290.0 – 300.0, we aim to move the stop loss up, below this area of support to protect profits.

*Disclaimer: This report is not intended to be used as investment advice or future decisions in personal investment activities. We are investment students and are NOT posting as CFA or qualified analysts/brokers.

Undergraduate BSc (Hons) Finance, Investment & Risk Student.

Strong interests in investment banking, financial markets and technical analysis. 6+ years of experience in multiple roles, including England, USA & Australia.

Undergraduate BSc (Hons) Finance, Investment & Risk Student.

Interests in markets and securities, focusing on the fashion industry and lux goods. My aim is to be a thought leader and a knowledge expert in this field.

Undergraduate BSc (Hons) Finance, Investment & Risk Student.

Strong communication skills, with experience in dealing with people of different backgrounds and nationalities having worked in retail as a keyworker during the COVID pandemic.

We would like to thank our Research Advisor, Alex Vidler, for his generous help and continuous support.

Sources:

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Markets.ft.com. 2020. Boohoo Group PLC, BOO:LSE Forecasts - FT.Com. [online] Available at: <https://markets.ft.com/data/equities/tearsheet/forecasts?s=BOO:LSE> [Accessed 4 November 2020].

Uk.finance.yahoo.com. 2020. Yahoo Is Now A Part Of Verizon Media. [online] Available at: <https://uk.finance.yahoo.com/news/hargreaves-lansdown-investors-buying-boohoo-103700977.html> [Accessed 4 November 2020].

Marketscreener.com. 2020. BOOHOO GROUP PLC : Technical Analysis Chart | BOO | JE00BG6L7297 | Marketscreener. [online] Available at: <https://www.marketscreener.com/quote/stock/BOOHOO-GROUP-PLC-16023307/charts/#> [Accessed 4 November 2020].