ASOS is the king of online retailing. But, given Boohoo fast growth in recent years, can they play catch up? And, out of curiosity, how far behind is Boohoo from ASOS?
Boohoo definitely needs time to catch ASOS, which has established a commanding lead.
Boohoo started late in 2006, compared to ASOS in 2000.
The online retail space is a growing market and some of that came from the bricks and mortar stores.
But this isn’t about pondering the changing ways consumers buy things. It is about assessing if Boohoo can emulate the success of ASOS.
Boohoo Brief Background
Despite being six times smaller than ASOS. Boohoo’s market capitalization is two and a half times smaller than ASOS’s £5bn valuation.
Boohoo is a cheap trendy version of ASOS with celebrity endorsements helping to get the word out.
That suggests the market has high hopes of success for Boohoo.
Boohoo was co-founded by Mahmud Kamani and Carol Kane. Mahmud holds 17% and Carol retains 4.5% ownership.
The purpose was to pay off £239.9m of convertible loan notes, which resulted in a smaller net proceeds of £46.1m.
You should be aware some of Mahmud Kamani relatives are big shareholders too.
Without further ado, let get on with the main assessment.
In this post, the aim is to I.D. seven important attributes that make Boohoo, a sustainable business.
Let’s get started
Important Attribute No. 1: Boohoo 2016 Acquisition Spree
Boohoo made two acquisitions.
One is a related-party* 66% stake in Pretty Little Things for £3.3m. Revenue in this small start-up is £30m at the end of 2015.
*The big stakeholder is Umar Kamani, the son of co-founder Mahmud Kamani.
The second acquisition is Nasty Gal’s intellectual property assets and customer databases. The price paid is $20m. Nasty Gal is an America business similar to Boohoo but filed for bankruptcy last year.
The business had sales of $300m.
Both these acquisitions expended little capital. It can be integrated into the Boohoo brand.
Lesson: – Acquiring others at reasonable prices is good business strategy. (Although one of the acquisition is a party (or relative)-related.) That helps to reduce the parent company “Goodwill”, which doesn’t need to get written-off in the future.
JD Sports is a prime example of making cheap acquisitions. In which, I wrote an article called “Learn why acquisitions make JD Sports more competitive.”
Quick background of Nasty Gal
Nasty Gal, like Boohoo and ASOS, is an e-tailer selling clothes online. Sales grew from $10m in 2010 to $300m by the end of 2015. But, unlike the British e-tailers, Nasty Gal never made money. Also, the company rely on one person, the founder Sophia Amoruso to drive the business.
Important Attribute No. 2: Boohoo is making Money
The obvious thing to measure a company success is the profits they make, not what they spin to investors.
In Boohoo’s case, data speaks louder than words.
We shouldn’t forget about net margins as Boohoo improves to 8.37%.
Lesson: Nobody goes into business to make losses because they would be worse off for it (in the majority of cases).
Making profits tell the markets, the company is the real deal!
Important Attribute No. 3: Boohoo building up its Cash Pile
If you want to create high market valuation, then build-up your cash balance. But, having an increasing cash balance means Boohoo is supremely competitive.
The blue bar shows how far Boohoo’s cash been building up. Out of £70m of cash, £46m came from net proceeds of its IPO.
Also, it spent £20m of acquisitions last year, where £12m was through borrowings.
Lesson: – Having lots of cash act as a safety net for a rainy day. You can boost your share price by paying a special dividend.
Important Attribute No. 4: Capital Investment is generating more Sales
Boohoo’s management must thank their lucky stars. Because every British Pound spent in capex, earns them an extra £7.34 of revenue.
That proves the company has a good business model of attracting customers.
At the same time, Boohoo is growing by spending more than it depreciates in assets.
Boohoo spending is substantially above the red line indicating growth. You can confirm this by looking at its sales numbers. But keep an eye out for high trade receivables growth influencing sales growth.
Lesson: – When a business generates more in sales than they invest in capital it is a good company.
If, for example, a business spent £1 of capital to generate £1 of sales the business net worth remains unchanged.
Important Attribute No. 5: The Brand is selling in Other Important Markets
The ultimate test for a retailer is gain appeal from around the world. And Boohoo (like ASOS) has that appeal.
Boohoo has sales diversity, especially in the US as it acquires Nasty Gal design patent. The advantages are plentiful.
Lesson: – A business having global outreach means other people wants to buy their brand. That gives it brand recognition, which helps to gain more customer and accelerate sales.
Important Attribute No. 6: Social Media Outreach
It would be disastrous if any online retailer doesn’t have social media coverage. Especially when your main audience is predominately young.
With Boohoo, it has huge numbers of followers and likes.
The 100s of thousands/ millions of followers attract referral traffic to their website. Last month, Boohoo has 11.8m unique visits with the average visitor looking through 11 pages.
For comparison, ASOS has 63m unique visits, clicking through an average of 13 pages.
Lesson: – More traffic (visitors) means more revenue!
Important Attribute No. 7: Having small amounts of debt
Given that retail has struggled in the past eight or nine years. It is wise to hold low amounts of debt because of the challenging consumer environment.
Boohoo has £12m of debt in 2017, which is reasonably small when it generates £30m in cash profit.
Also, in comparison with ASOS, it too, has little or zero debt on their books.
Having small amounts of debt means you don’t have to pay large interest costs. (From operating profits) And the repayment of their loans from free cash flow.
This free cash helps to expand their brand and acquiring others at a reasonable price.
Lesson: – Having debts mean the firm serves the shareholders. Having high debts level means the firm is serving the debtholders.
That concludes the seven attributes of making Boohoo great.
If, you can think of more important attributes, please leave a comment below.
We can’t end this post without giving my 2 cents of Boohoo (“hefty”) valuation.
Look at this chart:
It is a special chart, because of the way it measures the change in Boohoo’s PE Ratio. This is, before and after they announce their results.
In the last two years, BOOHOO saw a run-up in share price. Each year, investors believe it is becoming too expensive. And they were wrong, time and again.
Last year, Boohoo’s PE rose to 145 times, before releasing 2017’s earnings that drop it down to 65 times. And it looks like the share price is ramping up again, as its PE has risen to 84 times!
Well, Boohoo break their PE record of 145 times? That would give it a valuation of £3.4bn, which sounds crazy.
You can apply the seven attributes to any online retailers. It can serve as a benchmark (along with other benchmarks) to gauge a company’s sound financial operations.
Boohoo has global market outreach which will increase their exposure as their customer base grows. That would help grow their sales for a number of years.
If, Boohoo becomes unfashionable and doesn’t follow the fashion trend. It will come unstuck! Also, we can’t rule out new competitors.
Onto their valuation. Boohoo is expensive if you are a first-time investor. If you are a long-term holder, then it is wise to hold your shares. The integration of Nasty Gal and Pretty little things means a good year for Boohoo.
Good luck to those long-term shareholders!
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The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.
Finally, the writer does not own the company’s stock, unless stated otherwise.