2nd Nov 2022 15:28
(Alliance News) - Margin compression, rising competition, the need to cut costs but also spend on marketing means boohoo Group PLC faces a perfect storm.
That is according to investment bank Liberum, which downgraded the online-only retailer to 'sell'.
The retailer's key demographic of teens and young adults have been squeezed by cost-of-living worries. The company has also recently warned on sky-high clothing return rates, hitting its bottom line.
boohoo shares were 8.1% lower at 43.42 pence each in London on Wednesday afternoon. The stock has fallen over 75% over the past 12 months.
"boohoo is facing several headwinds; its consumers are under pressure, Shein is a fierce competitor which will only get worse, cost head winds are real and the need to invest in marketing and service may hold back profit delivery for longer than expected," Liberum commented.
"A net debt position will be a limiting factor in making long-term investment, thereby holding the return to pre-pandemic growth rates and margins for quite some time, if ever. We have clearly been wrong on our recommendation and change this to a sell (from hold) today reflecting the multiple challenges the group faces."
boohoo last month said it swung to a first-half loss, with earnings hurt by weak consumer confidence and a staggering number of clothing returns. Return rates were "up significantly year-on-year", boohoo said.
In the six months to August 31, revenue fell 10% year-on-year to GBP882.4 million from GBP975.9 million. boohoo swung to a GBP15.2 million pretax loss from a GBP24.6 million profit a year earlier.
Margins weakened markedly. Its adjusted earnings before interest, tax, depreciation and amortisation margin fell to 4.0% from 8.7%.
Liberum added: "boohoo is maintaining UK market share, but losing US share. It will struggle to return to 10% Ebitda margin levels due to price investment, permanently higher returns and marketing costs, and a slower pace of revenue growth."
Liberum said it's hard to "see value" in the stock at as the investment bank believes boohoo's sales slide will accelerate to 11% in the second half.
"This leads to Ebitda margins at the bottom of the 3-5% range," Liberum added.
boohoo expects an annual adjusted Ebitda margin between 3% and 5%, trimmed from its previous 4% to 7% guidance range.
On Tuesday, sofa seller Made.com Group PLC fell into administration. In a note hailing a strong third-quarter by Next PLC, analysts at Shore Capital Markets said Made's poor fortunes highlight the precariousness of online-only retail.
"Made.com's administration yesterday and Frasers' investment in ASOS last week remind us of the vulnerability of online pure players, with retailers needed for the survival of the direct-to-consumer brands, Shore explained.
By Eric Cunha; [email protected]
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