Boohoo: A latest update that offers some glimmers of hope

Boohoo Group PLC (LON:BOOH) has become more associated with red flags rather than glad rags, but this latest update at least offers some glimmers of hope.

The group has recognised that it needs to trim some fat, and has identified £125 million of annual cost savings over the next two years. At the same time, with the supply chain easing and with lower input prices beginning to filter through, boohoo has been able to pass on some lower prices to customers. Indeed, the group estimate that its average selling prices have fallen over the last year, as compared to price inflation of 8% for the wider UK clothing market.

These factors have also helped the gross margin along, with the number rising slightly from 52.5% to 53.4%. Excess inventory has also been reduced by 35%, releasing some cashflow, and despite an increase in net debt to £35 million from a previous £10.4 million, a newly renegotiated revolving credit facility gives further access to liquidity of £290 million, easing any shorter-term cash crunch concerns.

More broadly, the group’s business model allows flexibility and value to an ever-changing youth fashion market, while the acquisition of names such as Debenhams and Coast provide potential appeal across new audiences. Its determination to expand and automate is also in evidence with a new facility in Sheffield and, in particular, the launch of a new distribution centre in the US.

Boohoo is swimming against a strong tide, however, and recovery is not likely to become any easier. Online retail shopping has normalised to pre-pandemic levels as customers have returned to physical sites, while general inflationary and consumer confidence pressures remain in place. Revenues for the period dropped by 17% and gross profit by 16%, while at a headline level there was an adjusted pre-tax loss of £9.1 million, which compares to a profit of £6.2 million the year previous.

Revenues in core brands dropped by 10%, and active customer numbers reduced by 12% to stand at 17 million. In terms of outlook, the group is guiding a full-year revenue decline of between 12% and 17%, with adjusted earnings margins of between 4% and 4.5%, in contrast to the longer-term goals of 6% to 8%.

The accompanying comments from boohoo are defiantly optimistic, with the group pointing to a “clear path in improved profitability and getting back to growth.” The group added that substantial progress had been made across key projects and initiatives over the first half, lending confidence to medium-term prospects.

Even so, the scale of the challenge in boohoo’s rehabilitation remains significant, as evidenced by its share price performance and the accompanying valuation. Over the last year, the shares have dropped by 13% as compared to a fall of 12% for the wider FTSE AIM 100. This further decline has resulted in a plunge of 86% over the last two years, and 91% over the last three. Prospects for a recovery and the depressed share price may have tempted Frasers Group to recently up its stake to 9.1% from 7.8%, but for investors the outlook is potentially fraught with difficulty. The market consensus of the shares has nonetheless remained at a hold, suggesting some guarded support for a potential improvement in fortunes, despite a typically volatile and initially negative share price reaction to the update.