When a growth company’s shares fall sharply as online fashion giant Boohoo Group PLC’s (BOO ) did yesterday (-15%), how should investors react? Well the most important question is whether the investment thesis remains intact? And if so, how long will it take to get the locomotive back on track?
For me, CEO John Lyttle is pursuing exactly the right strategy.
Investing not only in sustainable growth – re brand recognition, sales/marketing, geographical expansion & selective M&A. But also supply chain excellence, warehouse expansion & automation – rather than chasing S/T profits. This is how Jeff Bezos at Amazon managed to build a $1.6 trillion behemoth over 25 years.
Indeed BOO has doubled its UK & US market shares over the past 2 years – boosting H1’21 sales 73% to £975.9m (+20% YoY), alongside enhancing its TAM to 500m customers vs 17.4m active today (+34% YoY). Plus the firm sports net cash of £98.4m, and has fully embraced/tackled last year’s vociferous criticism wrt its supplier working practises in Leicester.
In fact going forward, its ‘Agenda of Change’ initiative could even position BOO as best-in-class. In turn, encouraging those institutions who sold on ESG grounds, to return particularly given the depressed stockprice.
Sure H1 EBITDA margins (8.7% vs 11% LY) were lighter than expected due to the higher pandemic related input costs (eg freight, warehousing, personnel, etc), equivalent to a -2.7% hit - yet equally this should normalise in due course.
Similarly Q2 growth did slow to +10% vs 32% in Q1, but this again re-accelerated in September.
Meaning all told, H2 guidance remains at a healthy 20%-30% pa revenue growth delivering 9.3%-9.8% EBITDA margins. Longer term the Board are confident of achieving 25% CAGR & 10% margins.
Ok, so how much is the stock worth?
Well using ball-park figures - I reckon BOO could lift turnover to say £5bn (19% CAGR) over the next 5 years (Est FY22 £2.1bn). Which on a sector 20x EBITDA multiple (AMZN at 21x for FY22) & using a 10.5% EDITDA margin, would generate a hypothetical £10.5bn valuation, or 825p/share vs 218p today. Even at 15x, the stock would trade at 620p, and 10x at 410p.
Hence, I view yesterday’s mini blood-bath as the proverbial ‘storm in a teacup’.