Why Are Boohoo (BOO) Shares Falling as Sales Soar?

Manchester-based online retailer Boohoo (BOO) has increased sales by more than 50% over the past two years.

Yet its share price has been steadily falling since the start of 2021, with its current price of 95.12p per share down from an all-time high of 415p in June 2020 – and its lowest level since September 2016. .

What’s happening at the super-fast fashion provider, and can it return to previous highs?

Factory claims

The closure of physical stores and the extra disposable income from shoppers was apparently enough to make up for the fact that no one had anywhere to wear their new clothes in spring and summer 2020. Boohoo’s revenue increased by 45% in the six months to August 31, 2020, to £816.5m, while pre-tax profit rose 51% to £68.1m.

However, the stock plunged in early July 2020 when a Sunday Times investigation alleged that workers at a Leicester factory making labels owned by Boohoo were paid as little as £3.50 an hour and had poor health and safety provisions and long working hours (the factory involved has since taken legal action against the newspaper). Boohoo saw £1bn wiped from its value in one day.

The company commissioned an independent review of the matter and said it would implement “substantial, lasting and meaningful change”. This included cutting some suppliers and opening its first factory last month, where it says workers will be paid above the national living wage with guaranteed 40-hour contracts and 33 days vacation – but the he company and its brands continue to be targeted by protesters over its sustainability issues and working conditions.

Capital.com has contacted Boohoo for further comment.

Pandemic effect

During this time, the company continued to increase sales, but also set new challenges.

In its third quarter business update announced on December 16, Boohoo said these included higher return rates, continued disruption to its international delivery proposition impacting international demand and continued price inflation. “significant” costs.

As a result, the company lowered its earnings forecast – with earnings before interest, tax, depreciation and amortization (EBITDA) revised down by 35% for the full year to February 28, 2022 and by 46 % for the whole of 2023.

Chief executive John Lyttle said the current headwinds were “short-term” and should ease as the pandemic-related disruptions begin to ease.

“Looking ahead, we are encouraged by the strong performance in the UK, which clearly validates the Boohoo model,” added Lyttle.

Outside opinion

Rachel Birkett, an analyst at Zeus Capital, agrees with Lyttle, writing in a recent note: “We believe [Boohoo’s] the current cost headwinds are transitory, resulting from factors beyond the group’s control and we expect them to moderate as pandemic-related freight disruptions begin to ease.

“Confidence in the group’s longer-term potential is reflected in a commitment to invest in its global distribution network to support £5bn of revenue and an unchanged medium-term focus of 25% revenue growth and a EBITDA margin of 10%.”

Andrew Wade and Grace Gilberg, analysts at Jefferies, said the market was clearly expecting reduced earnings but the magnitude of the EBITDA decline reported in December was “surprising”.

They note that the outperformance of the UK market, which increased its net sales by 32% in the third quarter against a decline of 14% internationally, confirms Boohoo’s argument that its current problems are transitory.

But they add: “We find it difficult to attribute the international growth deficit between transitory factors and more structural pressures. Foremost in the minds of most investors here, as has been the case throughout the year, is competition, particularly from [Chinese ecommerce brand] Shein, as well as concerns about the brand’s resonance and scale outside of the UK market.

Collapse of Arcadia

In February 2021, Boohoo announced that it would acquire various brands (at least their e-commerce and digital assets) following the collapse of Arcadia Group, including Burton, Dorothy Perkins and Burton.

It is since then that Boohoo’s stock has continued to decline. Was there anything about this transaction that investors didn’t particularly like?

Probably not, according to Aidan Donnelly, head of equities at Irish wealth management firm Davy.

“There is usually a lot of indigestion when integrating new brands into your network, which takes more time than people at the time [thought]and factors like rising costs and supply chain disruption haven’t helped,” Donnelly told Capital.com.

“But you haven’t seen any massive lurches since then, no big numbers missed. The stock wasn’t coming down from the lows of the previous 12 months, so there was also a flattening in the stock price.

Market factors

Donnelly also pointed to the broader business and stock market factors at play.

“First of all, you have the change in conditions due to the pandemic. Initially, we saw share prices of work-from-home recipients soar, online retailers becoming gangbusters when there were no logistical issues. Now retail is reopening, people have other things to spend their money on. We’re seeing declines for a lot of these work from home recipients, like Netflix and Shopify.

“Then you have increasing competition not only from e-commerce brands but also from traditional retailers like Zara and H&M. They used to say pure bricks and mortar was dead, but now pure online is facing the challenge of omnichannel You also have your direct-to-consumer manufacturers, such as Adidas and Nike having large branded stores in city centers as part of an omnichannel model.

“Finally, there are broader stock market trends. Many high-growth, unprofitable companies have collapsed over the past six months as bond yields rose, starting last September in the US and Europe, when high growth companies with big expected future profits started selling and going downhill, and now you see it with high growth and high PE [price-to-earnings ratio] shares.

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