Portfolio Update: Boohoo
I bought a 5% position in Boohoo Group, a UK-based fast fashion retailer with 20 brands. Boohoo has been a phenomenal growth story about the past decade, but like most retailers today, they are now “out of fashion” by investors. The share price is down 2/3s ytd and down -84% last 12 months.
Boohoo guides for circa 2.0bn GBP in revenues for the financial year ending in spring 2023. The adjusted EBITDA margin guidance is 4-7%, so 5.5% at the midpoint. If Boohoo achieves a 5.0% EBITDA margin it would make 100 million GBP in EBITDA. As the current market cap is just 520 million GBP and the company has no net debt (100 million in cash and 100 million in interest-bearing debt), the EV/EBITDA multiple is only 5.2 at this point.
If that is not cheap enough, Boohoo had a normalized EBITDA margin of about 10% in prior years, which would put its EBITDA to around 200 million GBP. Given this cash flow, Boohoo can work out well for investors without any future growth. However, management is “highly convinced” they can soon get back to 25% annual growth.
Moreover, Boohoo has about 350 million GBP in property, plant and equipment, mostly from its London office and warehouses. These hidden reserves provide another layer of security.
Boohoo has strongly expanded its capacity in the past year, so any further growth should come with modest capital expenditures. If Boohoo only manages to maintain its current revenues, it will be interesting to see how it can optimize for margins, rather than growth.
I like the business model. Unlike Amazon or Zalando, Boohoo consists of 20 distinct brands. This allows for a unique brand strategy with separate websites, models, social media influencers, etc. I prefer this approach to having many brands mingled in one website, where its difficult to sell a particular image. Moreover, it provides diversification as it is unlikely many brands run into trouble at the same point of time. In contrast, the strategy allows for the sharing of best practices, so hopefully the different entities can positively influence each other.
In the background, Boohoo can still achieve economies of scale in terms of production, logistics, and by cross selling aging customers to their more mature brands.
I am selling my 5% stake in Google to finance the Boohoo purchase.