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What’s Boohoo getting right?

Daniel Lane

Daniel Lane - Fidelity Personal Investing

It’s all smiles at Boohoo this morning, with the company hiking its full-year guidance on the back of a strong end to 2019.

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The online fashion brand saw record trading in the last four months of the calendar year, with revenues to 31 December hitting £473.7m, up 44% on the same period in 2018.

This means revenue expectations for the financial year to 29 February have jumped to 40-42%, ahead of previous projections of 33-39%.

The group’s UK operations brought in revenues of £255.8m, up 42% in the final third of the year. But perhaps more interesting for investors is how the firm’s international ventures have contributed to overall revenues.

The Europe ex-UK division delivered a 54% increase to just short of £70m, with the US rising by 57% (£110.6m) and a 13% lift in the rest of the world.

US expansion has been key for the company and despite initial teething problems in managing the logistics of moving across the pond, a heavy focus on influencer-driven marketing seems to be doing the trick.

But there has been a cost to generating these record trading months. Margins are down more than 50% across the group’s key brands, as it looks to do battle on the seemingly perennially discounted fast fashion scene.

The next challenge will be integrating new acquisitions Karen Millen and Coast into the proposition. Boohoo’s fortunes so far have relied upon serving a young, cost-conscious and net native audience - not words associated with these two brands. However, for investors that’s apparently a conversation for another day, as the market has pushed Boohoo shares up nearly 5% this morning.

Where next?

The likes of Asos and Boohoo have become proxies for investors looking to be part of the future of retail, and with the problems associated with expensive flagship stores among traditional clothiers and waning high street footfall, it has been hard to fault them.

Identifying key beneficiaries of changes in consumer taste and behaviour is important but managing their transition into industry leaders is arguably more so. Both of these companies have hit very avoidable logistical snags in their expansion and are coming under fire from sustainability-conscious consumers campaigning against what they see as wasteful fast fashion practices.

Margins may be low today but if the game-changers come under further pressure to provide higher quality items at greater cost, suddenly a cost-focused customer base might not be so loyal.

While the meteoric rise of Boohoo is clearly thanks to an innovative strategy put to good use, the company’s future is dependent upon maturing from plucky upstart to sustainable leader. Global expansion has been the goal so far but diversification into product lines not subject to a simple rejection of “pile ‘em high, sell ‘em cheap” attitudes must be next.

This is why diversification is so important, for firms and investors alike. Ensuring at least some cylinders are firing at any one time means we aren’t vulnerable to the successor failure of one strategy in particular. Karen Millen and Coast might just be Boohoo realising this, for the rest of us it means making sure the assets in our portfolios are varied, uncorrelated and ready to tackle whatever comes next.

Five year performance

(%) As at 13 Jan 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Boohoo Group Plc 47.2 272.4 25.8 4 67.4

Past performance is not a reliable indicator of future returns

Source: FE, as at 13.01.20, in local currency terms with income reinvested

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Please be aware that past performance is not a reliable guide indicator of future returns. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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