Boohoo (BOO Stock) share price set to slide after guidance downgrade

It’s not been a great year for Boohoo’s share price, or its shareholders, for that matter with the shares down over 25% year to date.

Once a darling of the Instagram generation its reputation took a hit last year when it was revealed a supplier factory in Leicester was operating below the required standards as set by UK Health and Safety and was also paying below minimum wage levels.

This prompted the brand to lose a number of its online influencers as well as finding itself shut out by some other high-profile retailers, also concerned about how its younger cohort of customers might react to being associated with this sort of behaviour. 

Despite the brand damage, management looked to have drawn a line under some of these issues, when they took the decision to drastically cut back on the number of suppliers it uses in its supply chain to 78, down from over 200, as it looked to shore up its battered reputation, improve its oversight, and streamline its cost base.

Unfortunately, these issues came to the fore again in July after a report on Sky News, which the company responded to with a strong restatement.

Putting to one side the noise around the supply chain issues, the company got off to a strong start when they reported Q1 numbers back in June, carrying on the momentum we saw at the end of last year that saw the business post a 41% boost in revenues and a 35% increase in profits before tax to £124.7m.

So far so good but management lowballed their guidance for Q2, as well as the rest of the year, with a figure of 25% sales growth, and which served to drive the shares even lower.

This caution appears to have been well warranted despite record revenues of £975.9m, a 20% increase on this time last year and 73% higher from 2019. Market expectations, however, were set a little bit higher at just over £1bn.

Profits also missed expectations, largely as a result of rising costs, with adjusted EBITDA coming in 15% short of expectations at £85.5m. Adjusted profit before tax fell 20% from last year, coming in at £63.8m.

Part of the reason for the higher costs, was a record capex number of £172m, however as long as that helps to underpin the longer-term growth picture then most investors will look past that.

The more important detail was that the retailer also downgraded its sales growth expectations from 25% to between 20% to 25%.

It would appear that, despite the easing of lockdown restrictions any pent-up demand appears to have been offset by rising costs, as well as the willingness of consumers to get out and about more, and actually shop in store.

This is what appears to have hurt Boohoo’s numbers, that and perhaps setting the bar too high. Consumers have had most of the first part of this year to shop online, and the easing of restrictions has prompted many to jump off their keyboards and get back outside again.

Even with the weather getting colder Boohoo appear to be cautious about the outlook going forward, particularly from a costs point of view, which they think will continue to remain high through the second half of this year.

If shareholder were hoping that today’s Q2 and H1 numbers would help to reverse the company’s fortunes, today’s update isn’t particularly encouraging. 

On the plus side Boohoo was able to announce a deal with Alshaya Group in the Middle East which will see boohoo brands in Debenhams stores across the region, which should help the company expand its addressable markets even further.