Boohoo.com bashed despite beating sales and profit forecasts

Shares in Boohoo.com sank 8% in early trading despite the fashion e-retailer doubling first-half sales, beating profit forecasts and upgrading full year guidance, with investors miffed as investment in the business is leading to slightly lower margins.

The AIM-listed group generated sales of £262.9m during the six months to 31 August, an increase of 106% on the same period last year and ahead of the consensus City estimate of £248m.

With sales growth momentum from its newly acquired PrettyLittleThing brand surging 289% in the first half and expected to be around 150% for the full year and the core Boohoo business aiming for close to 30%, management hiked full year revenue growth guidance to 80% from 60% previously, though many analysts were already predicting 75% growth.

The Nasty Gal brand, having been rebooted after its acquisition in March, delivered revenue of £8.4m as it increased sales month-on-month since start-up.

Gross margin was cut to 53.3% from 55.3% to reflect planned investments in the price, promotion and marketing, while investment plans also include putting "significant" cash into IT infrastructure and warehouse capacity..

Nevertheless, first half adjusted earnings before interest, tax, depreciation and amortisation increased 68% to £27.8m, again beating the analyst consensus of £26.5m at a margin of 10.6%, with management guiding to a full year margin range of between 9% and 10% as the strong sale from PrettyLittleThing is offset by investment in price, promotion and marketing.

Earnings per share increased 24% to 1.25p.

Joint CEOs Mahmud Kamani and Carol Kane highlighted international growth as being strongest, with PrettyLittleThing exceeding growth expectations with international sales being nearly seven times higher than in the first half of the previous year.

"PrettyLittleThing is fast gaining recognition amongst our target consumers as a highly desirable fashion brand in the UK, and its international growth is very encouraging, confirming its considerable potential," they said, adding that Nasty Gal was growing well after being "rebuilt by us from virtually a zero base" and was expected to contribute £20-24m compared to previous expectations for £10-15m.

Kamani and Kane said the integration of the two new brands was "adding diversity to our business whilst enabling us to draw upon our strengths in marketing, sourcing, operations and customer service to deliver profitable results and greatly increasing the group's potential".

Saying the significant investment in IT and warehousing would "ensure stable and sustained execution of the group's growth strategy", the pair said plans were progressing for the next phase of longer term requirements for warehouse capacity.

On top of this further implied investment, the joint CEOs said they will "continue to invest in the customer proposition, further develop our brands and maximise the considerable opportunities that a global marketplace affords us".

Boohoo shares were down 8% to 238p after around an hour of trading on Wednesday.

Broker Shore Capital said the revised group margin guidance, down from the previous 10% reflects the further investment.

"We also point to the focus on driving the topline for PLT, which is now becoming a larger proportion of the group but delivering a lower profit margin given it remains more immature than the core brand."

ShoreCap noted that Boohoo shares were trading on a full year price/earnings ratio of 83 5 times, falling to 61 for the year to March 2019.

"With first half trading ahead of market expectations, we continue to have confidence in the business model. Management continues to utilise its extensive experience in apparel and has successfully diversified away from a single brand proposition."

Broker N+1Singer was already forecasting 75% revenue growth and 9.8% margin, so was not hugely impressed, remaining at a 'hold' recommendation.

Analyst Jamie Constable said at the bottom line the increased guidance should drive a maximum 7% PBT upgrade.

"Is this enough for a stock trading on a PE of 70x. I don’t think so and would expect to see some profit taking today."

Investec's Alistair Davies noted that EBITDA margin fell 240 basis points to 10.6%, but from central overhead increases to support growth and should in time be leveraged.

He noted that PLT guidance for 150% growth implied second half sales below the first, "which could prove conservative".

"From an EBIT/PBT perspective, there are downgrades reflecting increases in non-cash share-based pay as well as acquisition intangibles not previously included in our underlying forecasts.

"Share price weakness provides attractive entry point as we see Boohoo as a high quality multi-year international growth story, with continued upside risk on top line forecasts," Davies said, upping his target price to 270p.