The last time I covered Boohoo Group (LSE: BOO), I concluded it might be a good idea for investors to avoid the company for the time being, as its high valuation and slowing growth could become a toxic combination.
Since the article was published, shares in the company have fallen a further 5%. And I believe this could be just the start of the group’s fall from grace. Today, I’m going to explain why I believe the Boohoo share price has further to fall.
Competitive sector There’s no denying that Boohoo and peer Asos have revolutionised the online fashion industry over the past decade. These two have almost single-handedly upended the traditional brick & mortar fashion sales channel, pushing down prices and pushing up customer expectations.
However, copycat companies are now starting to spring up left, right and centre, and traditional retailers are starting to get their act together as well.
Analysts believe these pressures are already starting to cause a headache for Boohoo. One group of City analysts have identified 11 other companies in the UK that are taking on Boohoo directly, meaning the company is having to spend more money on marketing and promotional pricing.
That said, as the second biggest in the sector, I think it’s highly likely the group will be able to fend off competition. The question is, at what cost?
Cracks starting to show After looking carefully at Boohoo’s numbers, I think cracks are already beginning to show in its business model. The company’s latest trading update, published at the beginning of January, touted its new forecast for topline growth of 43-45%, higher than the previously-expected 38-43%, mainly thanks to a near doubling of sales at the Pretty Little Thing fashion brand.
In comparison, sales at the group’s largest division, Boohoo, only increased by 15%, below City expectations. So, sales growth at the core business is slowing, but Pretty Little Thing is bounding ahead. The problem is, Boohoo only owns 66% of this faster-growing business. The other thing I’m worried about is Boohoo Group’s valuation.
Look out below As the firm has expanded in recent years, it’s been easy to justify a sky-high multiple for the shares. However, with competition intensifying and growth slowing, I believe the risks are increasing and the group won’t be able to achieve the City’s lofty targets for growth.
And if this does happen, shares in the fast fashion retailer could fall rapidly as they are currently dealing at a forward P/E of 44 which, in my opinion, looks expensive, even when you factor in the City’s growth projections. Indeed, the stock is currently trading at a PEG ratio of 1.7.
Having said all of the above, I think Boohoo still has enormous brand value with consumers, so I don’t believe the company’s growth will evaporate overnight. However, with the stock trading at such a high multiple, I see minimal upside from here for investors but plenty of potential downside.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended ASOS (LON:ASOS). The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019