Shares of Manchester online fashion giant Boohoo fell about 10% on Thursday as it warned investors its full-year margins will be below previous forecasts amid “freight inflation in our supply chain and wage inflation within our distribution centres” as well as increased capital expenditure (capex).
That’s despite interim results showing Boohoo’s revenue jumped 20% to a record £976 million in the six months to August 31, 2021.
AJ Bell investment director Russ Mould pointed out that Boohoo reported second quarter sales growth of 9%, significantly below the analyst consensus forecast of 28% growth.
First-half profit before tax fell 64% to £24.6 million.
“Profitability was impacted by a number of cost headwinds driven by short-term factors largely relating to the pandemic and our investment as we scale our newly acquired brands,” said Boohoo.
“These include: increased marketing investments in key markets and our new acquisitions, two warehouse operational moves, returns rates normalising and materially higher shipping costs.
“COVID-19-related distribution cost increases totalled approximately £26 million in the first half, or 270 basis points of margin.”
In its full-year outlook, Boohoo said: “Elevated short-term cost headwinds experienced in the first half are expected to continue in H2 alongside recent freight inflation in our supply chain and wage inflation within our distribution centres.
“Consequently, adjusted EBITDA margins are now expected to be 9% to 9.5%, compared to 9.5% to 10% as previously guided.
“Reflecting ongoing investments across our technology, offices and infrastructure (including the initial phase of the international distribution centre), capex is now expected to be £275 million, slightly above the top end of previous guidance of approximately £250 million.
“The COVID-19 factors impacting EBITDA this financial year are expected to normalise over the medium term.
“Recent inflation in freight, logistics, and labour costs are expected to reduce from elevated levels in time, particularly as the group invests in its own infrastructure through implementing more advanced automation in its existing distribution centres, global travel capacity increases and our first global distribution centre opens in North America.”
AJ Bell investment director Russ Mould said: “Boohoo is one of the big names that has helped to create the fast fashion movement.
“It has done so well in recent years that sales growth expectations have been very high.
“It’s been a real hit with younger people, drawn to its cheap dresses and constantly changing product range.
“When it disappoints on the sales growth front, the market takes a very dim view of the company.
“That’s the situation now after the company reported second quarter sales growth of 9%, significantly below the analyst consensus forecast of 28% growth.
“Profits have also been hit by higher costs, which is a force disrupting numerous industries.
“Boohoo has blamed the slower second quarter on more UK customers returning products, competition from physical stores reopening after lockdown restrictions were lifted, as well as consumer uncertainty and ongoing Covid-related disruption in overseas markets.
“During the various lockdowns a lot of people couldn’t be bothered to go to the Post Office to return items, so clothing retailers benefited from fewer returns.
“Historically fancy items were more likely to be returned, such as dresses after wearing them (with the tags still on) to a party.
“Restrictions on social gatherings meant those items were in lower demand during lockdowns, but demand is bouncing back and so too are the returns.
“The end of furlough is going to weigh on Boohoo given that people who were still on the jobs support measure as it ended may well have been in its target customer range given the typical young age of people in roles that have been affected, such as in the travel sector.
“It’s important not to get too hung up on one quarter’s results and it is encouraging to see Boohoo report better trading in the past few months.
“Strategically Boohoo is getting its act together on the ESG front, with more control over its supply chain and various initiatives to make amends following poor governance.
“The company also continues to expand organically and via acquisitions, finding new ways to reach a broader audience and to sell more items to customers, such as beauty products.
“A plan to launch a resale platform in 2022 is also interesting as it shows Boohoo is taking steps to ensure that customers don’t stray too much to competitors, which include second-hand sellers such as Depop and Ebay, as well as the likes of ASOS.”