Boohoo shares face recession headwind

Boohoo.com gave its investors something to cry about as its full-year profits slumped and the company warned of further challenges to come. Full-year pre-tax profits at the online fashion retailer collapsed by 94% to £7.8m (from £124.7m last year), despite revenues rising 14% to £1.98bn.

UK sales at the Aim-quoted firm increased by 27% during the period. However, net cash dwindled from £276m to just £1.3m and gross margins slipped by 170 basis points to 52.5% (from 54.2%). Shares fell by 10% on the results day.

However, Boohoo’s management says the company is growing market share and is better positioned for the future than it was two years ago. “Over the past two years, we have significantly increased market share in our core geographies of the UK and the US, and we have grown active customer numbers by 43% across the group to 20 million,” group chief executive John Lyttle told investors.

“Our focus over the past two years has been on investing to build a strong platform, with the right infrastructure, supported by increased capacity to better serve our customers.”

Boohoo warns on outlook

However, the company also says the issues that have plagued it following the pandemic look set to continue for the immediate future. These include “uncertain consumer demand,” higher freight costs, tough comparative figures from previous years and pressure on sales growth from higher product return rates.

As such, revenues for the first-quarter will be flat, although the retailer’s performance is expected to improve in the second-quarter and second-half as profits tend to be weighted towards the latter-half of the year.

Boohoo now anticipates sales growth in the “low single digits” – analysts had previously pencilled in around 9%.

“In the year ahead we are focused on optimising our operations through increasing flexibility within our supply chain, landing key efficiency projects and progressing strategic initiatives such as wholesale and our US distribution centre,” said Lyttle. “This will ensure that the group is well-positioned to rebound strongly as pandemic-related headwinds ease.”

With the Bank of England now warning the UK may enter a recession last year, pressure will continue to bear on consumers' pockets. But with inflationary pressures, Boohoo could have to raise prices on its clothing.

Retailer couples cost cuts with costly capex

The company says it has embarked on a cost cutting programme, is targeting stock control improvements and trying to source its product more efficiently. However, it is also building a new distribution centre in the US.

Liberum analyst, Wayne Brown, was critical of management’s focus on capital expenditure programmes. “With margins declining, sales hard to come by and competition as rife as we have ever seen it, layering on debt and doing expensive capex projects seems unfortunate timing,” he said in a note.

Boohoo shares are down 76% in the past year and currently trade at 74.76p. They could be a recovery play or even a takeout target at these levels. But with inflationary headwinds continuing and a UK recession on the cards, a share price revival could take some time.