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Are Boohoo shares a recovery buy?

Will Boohoo’s share price recover after trading turned a corner?

Boohoo's share price jumped 17% on Thursday to 91.97p after the company surprised investors with an upbeat trading statement after last year’s profit warnings. Shares in the AIM-traded online fashion retailer collapsed from a high of 359p in April 2021 to just 74p last year after it warned profits would be lower than analysts’ forecast in September and December.

In the three months to the end of February, the retailer saw net sales growth of 7% in the fourth-quarter (48% growth over 2 years) and growth of 14% for the full-year.

Boohoo said that in the quarter, gross sales growth was strong - up 26% compared with the same period in 2021 and up over 50% (57%) compared with the same period in 2020. The company, which owns brands such as PrettyLittleThing and Coast, continued to be affected by higher return rates than expected. Management blames this on the “product mix” and says it expects this issue to continue into the first-half of 2023.

Boohoo ‘returns to growth’ internationally

Trading in the UK was strong, however, the digital retailer’s international performance is still being negatively affected by pandemic-related supply chain issues. Nevertheless, the company saw a return to growth in the rest of the world thanks to the performance of wholesale.

Boohoo now expects to deliver adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of £125m, in line with the revised earnings guidance it gave at the previous profit warning in December. It posts full-year results in May.

"The Group has delivered strong growth over the last two years, which has translated into significant market share gains,” John Lyttle, group chief executive told investors. “We are confident that pandemic-related headwinds are short-term in their nature and our focus is to ensure the business is well positioned for growth as these headwinds ease."

These figures were in line with Boohoo’s previous pre-Christmas profit warning in its third-quarter trading update. At the time, the retailer told investors that it expected net sales growth to be 12% to 14%, compared to previous expectations of 20% to 25% for the year to 28 February 2022.

Poor working conditions at Boohoo factories being addressed

Boohoo has also been criticised for the poor treatment of the staff at its factories in Leicester. A number of ESG (sustainable) investors pulled out of the company following concerns about employee working conditions and safety issues around Covid.

However, the company says it is working to improve matters through its Agenda For Change (A4C) programme, which is being overseen by retired judge, Sir Brian Leveson.

Boohoo's suppliers now have to seek independent approval on sourcing and ethical compliance.

Boohoo pulls out of Russia

Along with a number of other retailers including ASOS and H&M, Boohoo has suspended trading in Russia in response to Putin’s invasion of the Ukraine. However, the company stressed that Russian sales were “not material” and comprised of less than 0.1% of group revenues.

“Boohoo is deeply concerned about the tragic developments in Ukraine,” the board said in its statement. “Immediately following the invasion, the group suspended sales to Russia, and also closed its Russian trading websites.”

Analysts raise price targets on Boohoo shares

Following the brighter trading update, a number of analysts have raised their price targets on the shares. Broker Deutsche Bank issued a buy rating and set a price target of 230p, while analysts at Liberum think the shares could hit 200p.

Shore Capital also reiterated its ‘buy’ rating on Boohoo. The broker points to the retailer’s “structurally higher EBITDA (earnings before interest, depreciation and amortisation) margin” [compared to] others outlets which also sell third party brands because of its own label focus. Analysts there expect the company’s performance to improve once supply chain issues ease.

“Faster delivery times remain the critical competitive advantage, while the recent extension into mid-market brands should inoculate boohoo from competitive threats,” the analysts commented. “Boohoo has demonstrated a great degree of adaptability and built a portfolio of brands (organic and acquired) that allow it to focus on a broader market with enhanced segmentation.”

The online retailer will have to contend with continued inflationary headwinds and the likely margin squeeze. However, with Boohoo’s shares down 70% this year, they are a speculative buy on recovery hopes.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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