Boohoo Group trading in the UK remains resilient says Zeus Capital

Boohoo Group plc (LON:BOO) Q4 revenue growth of +7% YOY is ahead of ZC est. of +4.9%. Moderation in growth over FY22 reflects tough prior year comps, with the closure of physical retail driving strong growth over Q4 FY21. On a two-year basis, against a pre-COVID comparative of Q4 FY20, revenue was +48% (equating to a CAGR of 21.7% from FY20-FY22). Return rates remained elevated through Q4, offsetting much stronger Q4 gross sales growth of +26% YOY, and +57% on a two-year basis (versus Q4 FY20). Increase in the returns rates (ZC est. c.32% in Q4 FY22 versus c.20% in Q4 FY21) reflects normalising product mix, with a greater proportion of dresses and occasion wear versus a higher mix of casual and loungewear in the prior year. This trend is expected to continue over H1 FY23 as the normalisation in product mix annualises. 

By region, trading in the UK remains resilient (ZC estimates Q4 FY22 UK revenue +15-20% YOY) and reflects ongoing market share gains in the Group’s largest market (c.63% of Group). International sales remain impacted by longer customer delivery times due to pandemic-related supply chain pressures. Delivery into the US continues to be constrained by reduced airfreight capacity. The Group remains on track with plans for a US warehouse, to go live in Summer 2023. There was a pleasing return to growth in ROW driven by wholesale demand, including Alshaya which operates the Debenhams brand across the Middle East.  Wholesale presents an attractive growth channel for the Group, particularly in markets that are more challenging to serve. Sales to Russia are suspended, having represented less than 0.1% of Group revenues.

FY22: FY22 revenue is +14% YOY (versus FY21: £1,745m) and is +60.6% versus FY20 (FY20: £1,235m), a 2-year CAGR of 26.7.% FY22 EBITDA is expected to be approximately £125m, equating to an EBITDA margin of c.6.3%.

Zeus Capital Forecasts and outlook: We update our FY22 estimates to reflect today’s announcement. Revenue of £1,983m is +0.5% versus prior estimate of £1,973m with EBITDA of £125m marginally below the £128.3m previously forecast. FY23E numbers are unchanged, and will be revisited alongside FY22 full year results, to be published on 4 May 2022.

Valuation: Following a sharp de-rating in share price, BOO trades on FY22 PE of 15.7x falling to 10.8x in FY23, representing more than 50% discount to peers. We believe the consistently strong UK performance is testament to the Group’s strong customer proposition across price, product, and service, with international weakness the result of transient market headwinds that we believe will normalise over time. Our DCF implies +80% upside (based on heavily moderated growth assumptions and an increased discount rate) with the shares appearing oversold at these levels.

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