New Short for autumn – Boohoo at 33p, valuation a rum n’coke: first warning shot fired

Comments

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   Paul Scott

   21 September 2015, 14:00

   Tom,

   Sorry but this article is utter nonsense! Let’s take each point in turn;

   There is no similarity between BooHoo (a highly profitable, successful, established business) and the crappy jam tomorrow shares which you (and I) agree were good shorts, which you mention in your preamble. So the preamble is totally meaningless in the context of BOO. An attempt to imply guilt by association, despite there being no association whatsoever between the companies you mention and BOO.

   Market cap is too high – actually, no it isn’t at all. If you do some proper research, you’ll discover that It’s the only reasonably-priced internet retailer on the UK market. At 30.75p per share the mkt cap is currently £345m. It has no debt, but holds most recently reported net cash of £54.1m, or 4.8p per share. So the Enterprise Value is £290.9m, or 25.9p per share (there are 1,123.1bn shares in issue).

   As you know, growth companies are not valued on historic PER, and often look ridiculously expensive on historic earnings – Asos looked expensive all the way from 10p up to £70 per share.
   For BOO, consensus forecast earnings for this year is 1.07p EPS, so on EV that is a PER of 24.2 – perfectly reasonable, arguably cheap, for an online retailer which is growing the top line fast, and is already decently profitable, and which is international, not just UK remember.

   The forward PER drops to just 19.3 times forecast EPS for 2016/17. That’s astonishingly cheap for a fast-growing internet retailer. Despite having dropped by two thirds in price, Asos (of which I have been a public bear from £70 down to £25) is still valued on a fwd PER way higher than BOO, it is about 48, more than double BOO’s rating.
   Ocado is on a fwd PER of 119! Yet BOO actually has better profit margins, and similar or stronger growth than either of those highly priced comparators. KOOV and MYSL are not profitable at all.

   Carpetright or Mothercare have a similar fwd PER to BOO, yet BOO has much better growth underway, so it’s cheap compared with other online stocks, and is even cheap compared with some bricks & mortar retailers. Look at the PEG, and then you might understand this point better – BOO is cheap on a PEG basis, especially when you normalise discretionary marketing spend.

   “Boohoo has issued at least one profits warning in its brief stockmarket history.”
   Please don’t embellish the truth! It has issued one profit warning only, in Jan 2015, not “at least one” (which implies more than one!). There is an important difference! Let’s just present the facts, not skew them either way, to fit a narrative.

   “It is not generating cash (although with its business model it dam well should)”

   WHAT?!! Where on earth did you get this nonsense from? Look at the accounts – it’s a cash machine!
   Operating cashflow was positive at £14.8m in 2014/15, of which some was spent on capex – the company is drastically increasing the size of its distribution centre (by about threefold) to be able to cope with turnover rising from £140m last year to an anticipated £500m+ in several years’ time.
   Even after capex, it’s free cashflow positive. You won’t find many rapid growth internet retailers that can self-fund rapid expansion like this – most have to do repeated fundraisings, or borrow from the bank. BOO has terrific cashflow, which is one of the reasons I like the shares so much. I wouldn’t touch it, if it didn’t generate positive cashflow.

   Moreover, because BOO sells for cash, and pays suppliers later, on normal trade credit, as the business expands it actually generates more cash – so there won’t ever be a cash call on shareholders with this business, indeed many people are wondering why it raised any fresh cash at IPO, as it didn’t actually need it. Although the FD is considering completely automating the warehouse, so it could be used for that. Also the company has authority to buy back its own shares.

   “… and earnings last year were flat.”

   Hmmm, true to a certain extent, but earnings here are a moveable feast, because management make a decision to make whatever profit they like, by adjusting the marketing spend up or down. BOO spends about 15% of turnover on marketing, a huge figure, in order to drive growth. So they have been quite open about a strategy of accelerating growth, and accepting lower profits in the short term. OR balancing up the two in whichever way they want. You’ve overlooked this key point. Online retailers have much more flexibility on profit than physical retailers, because so much more costs are variable, instead of fixed. True, they had a hesitant autumn/winter season last year, as some errors were made. However, last year’s disappointing autumn is this year’s easy-to-beat comparatives.

   I suggest you get hold of the Peel Hunt research notes on the company, which are well-written, and explain how the business works. Peel Hunt are indicating earnings forecast upgrades are likely for H2 this year. Investec have also painted a more positive picture of this year’s figures.

   BOO has recently (last few weeks) launched its first App – amazing that they did not have one before, but good news that they have one now. That will be a further positive driver for current sales.

   “Longer term we have the issue that the only barrier to entry in online retail is capital. And that means that high gross margins across the sector will inevitably erode. That means that this is not a long term growth story.”

   I spent 8 years as an FD in clothing retail, so know the sector very well indeed, from the inside. Fashion retail has always been highly competitive. There are at least 40 established national chains in the UK, with numerous other independents. They nearly all have transactional websites, and that has been the case for several years. The net margins from online sales are actually very similar, or even lower, than from physical stores. That might surprise people, but one of the reasons is that online sales typically result in a 30% returns rate, which hits margins for online retailers. BOO has a lower returns rate of about 20%, according to a SCSW article recently.

   To succeed either with physical stores, or online, you have to get numerous things right, all the time. The fashion itself (right product at the right price, at the right time), quality, logistics, managing numerous sites, etc. Online brings other challenges such as website management , payment processing, huge volume of returns, customer service, etc etc. If it was easy, everyone would be doing it! Lots of people have tried, but most fashion websites never get off the ground because the required marketing spend is so large, to build the customer base, and takes years, that few survive long enough to reach critical mass. That is why only a handful of pure play online fashion retailers have so far succeeded.

   So your idea that anyone could succeed at online fashion retail, if they throw enough capital at it, is partly true – but you could say that about any sector! If I threw enough capital at a physical chain of stores, I could probably make a successful business. If I threw enough capital at a star-up making cars, I could make a successful business after spending a few £billion! But how many new entrants do you see coming into fashion retail, throwing £100m+ at it, thinking it’s easy? None that I have seen!

   If you think fashion retail is easy (either physical stores, or online), then please have a try at doing it, or ask people who actually do it, and you’ll discover a world of stress, endless problems, and extreme difficulty in making any profit at all. Only the very best survive and prosper, and they have to be good at everything, all the time, to eke out a net margin of say 10% or less in most cases.

   Anyway, let’s see what the results & outlook statement look like next week, on 29 Sept – I strongly believe that you will end up looking foolish, with comments that are poorly (if at all) researched, and where you clearly don’t properly understand the business model – e.g. understanding “test and repeat” is crucial to understanding why BOO is able to make decent (but not exceptional) profit margins, despite being cheaper than the physical stores that it competes against.

   Prices are set by physical stores, since that is still where the bulk of fashion spending goes on. So the idea that online retailers will be in a race to the bottom on price, is I think mistaken. If that happens, then eventually all High Street stores would go bust, and everyone would go online. Which is not going to happen, as many people like to try on clothes before buying them. BOO has a nicely profitable niche, and ask the target audience of 16-24 females, and they nearly all know it, and lots buy from the site. It’s not perfect – quality is patchy, but this is more or less disposable, fast fashion, so people understand that you get what you pay for.

   Also, you need to understand that management at BOO are long-time rag traders. Rough & ready – so I am sure you will find emails where Mr Kamani has been very rude to people, he’s well known for his colourful language (as indeed are you!). The fashion retailer I was FD for, for 8 years from 1993-2002, used to buy a lot of our stock from Kamani’s firms called Pinstripe & Jogo, which sourced the fashions & sold to retailers. They have decades of experience, and a network of suppliers globally that is second to none. Again, this can’t be quickly or easily replicated, as it’s all based on personal relationships.

   “And there is more to come. I have been passed a huge raft on internal documentation and other material which I am starting to work through and it looks very interesting. Of course there may be nothing afoot in which case the only issue is a sky high valuation for an unexciting story. Or it could be that I start a major autumn campaign on this one. Either way, Boohoo looks like slam dunk sell with an initial target of 20p.”

   I don’t like this one bit. You should not brag about having unauthorised access to any company’s documents. Also, please don’t imply there MIGHT be something (unspecified) wrong – as it just looks like you are trying to scare people, in order to drive down the share price. Very bad form. IF you have something unpleasant to reveal, then fine, reveal it.

   The only dirt you may find on this company, is that they ramped up growth expectations too high in the IPO. But we already know that. Other than that, it’s a genuinely profitable, fast-growing, successful business.

   Overall Tom, you’re wildly wrong on this. But there again, what do I know? I only ran a business in this sector for 8 years, and bought millions of pounds of clothing from BooHoo’s predecessor company!!

   Let’s see what the numbers look like next week, and then you can eat some humble pie. Or, if you’re right, then I will eat humble pie, and bow to your superior analysis.

   By all means shine a light on crappy, over-priced stocks, and most of your work on this is very good. In this case however, your choice of target is about as daft as it’s possible to get – you’ve chosen the only sensibly priced growth pure play internet retailer in the UK market, and complained that it’s expensive! The opposite is the case.

   I’m all for good debate, and sensible bull-bear discussion, but your comments on BOO have been terrible – I don’t think you’ve researched the company properly at all! So I’ll email you some decent quality research notes on it now.

   Paul.

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   David Williams

   7 April 2016, 19:02

   7 April 2016

   Currently around 43p.