Control isn’t something that Boohoo’s management has a great deal of at the moment. Shipping costs are rising, stock deliveries are taking longer and shoppers now require more persuasion to part with their cash.
Failure to get a good enough handle on these issues means that revenue growth for this year is expected to slow again and margin guidance has weakened to between 4 per cent and 7 per cent, prompting analysts to cut their profit forecasts.
Investors have little faith that Boohoo will be able to surmount these challenges soon. The company is now the second-most-shorted stock in London, with bets that the share price will fall further ratcheting up to an all-time high. Continued pessimism comes even after a share price decline of just over three quarters over the past year. Based on historical norms, Boohoo looks ultra cheap, with an enterprise value of only 0.5 times forecast sales and just over eight times earnings before tax and other charges. With expectations on the floor, the question is whether Boohoo will disappoint again. The answer? Probably.
The inflationary challenges posed to margins are neither unique nor surprising. Together with the cost of investing in newly acquired brands, including Dorothy Perkins and Burton, higher freight expenses meant the margin dropped to 6.3 per cent, some way below the company’s 10 per cent target level, which it was able to hit the previous year. But mitigating these inflationary pressures in order to achieve the recovery in performance that Boohoo is hoping for from the second half of the current financial year will be a tough task.
The group is resisting increasing prices, in fear of giving up market share and of sales volumes slipping further. Fending off competition from fast-fashion operators such as Asos and Shein has meant increasing promotional activity. Any further decline in the average number of items per basket, which decreased from 3.34 to 3.04 last year, has margin-sapping potential as similar costs are incurred to deliver items that may have a lower value.
John Lyttle, the chief executive, is hoping that cost efficiencies can be mined from automating more of its warehouses. He is also hoping that the group will grow into the increased scale it has built by acquiring the former Arcadia brands. But achieving payback for the large sum paid out as part of those deals might not be so easy because there is a very real chance that sales volumes don’t recover as quickly as hoped.
Plans to operate with lower levels of inventory by managing stock more tightly will need to be carefully balanced with the potential for further delays in delivery times. The group is planning to shift more of its stock sourcing closer to home, from Europe and North Africa, in the hope of tackling those shipping delays. Lead times are still longer, but better than they were at their peak, according to Lyttle. Those delays mean Boohoo will need to invest behind prices and marketing to recover lost ground in the United States and Europe, thinks Liberum, which estimates that the margin will remain below the 10 per cent target until 2027.
Heightened capital expenditure of almost £262 million meant the group’s cash pile fell to a net position of just £1.3 million by the end of February. This year, expenditure is guided at between £100 million and £120 million, which includes spending on a new US distribution centre. Lyttle reckons that sum can be funded by cash generated by the business, but that will depend on how rapidly sales volumes recover and how it can offset higher operating costs. Both are uncertain.
ADVICE Avoid
WHY High competition and a cost pressures mean there is a high risk that the group will miss guidance again
OneSavings Bank
Recovery for most London-listed banks has stalled, as trepidation mounts that falling real incomes could prompt defaults from squeezed borrowers, but OneSavings Bank has managed to retain more investor confidence and a sizeable premium against forecast net tangible assets.
Greater loan book growth and a return on equity that stands head and shoulders above mainstream lenders at more than 20 per cent has afforded the buy-to-let mortgage specialist more credit from the market. Unlike those rivals, about 70 per cent of its lending is focused on buy-to-let rather than consumer-focused unsecured lending or residential mortgages.
That doesn’t mean the risk of rising defaults isn’t there, particularly if tenants find it more difficult to make the rent, but OneSavings hasn’t noted any rises in bad debts yet, with the proportion of loans three months or more in arrears said to be stable during the first quarter compared with the end of last year. The average rent cover — calculated as landlord rental income as a proportion of their mortgage cost — within the buy-to-let loan book is also at about 200 per cent, according to Andy Golding, the chief executive.
An increase in the base rate means OneSavings expects its net interest margin this year to be ahead of last year, better than previous guidance. Shore Capital, the broker, raised earnings forecasts for this year and the next two years by 3 per cent and 4 per cent, respectively.
The bank is in the process of gaining permission to switch the approach used to calculate the amount of capital it needs to hold against the loan book from a standardised to more sophisticated methodology. Reducing the capital required is one potential benefit, which in turn could prompt the lender to return more cash to shareholders.
A £100 million share buyback programme began in March, but analysts at Shore Capital assume returns of that magnitude and by that method each year in future. That would be in addition to a dividend of 26.5p a share, forecast by the broker for this year, equating to a potential yield of 4.7 per cent at the present share price.
ADVICE Buy
WHY Surplus capital leaves lots of room for cash returns
