Boohoo issues profit warning, UK strong but Covid hits global performance
Demand for Boohoo Group’s products in the three months to the end of November (Q3) may have exceeded Q1 and Q2’s performance, but the company has still issued a profit warning for the full year. It's shares were down 15% in early Thursday trading.
On Thursday it said that “expectations” for the year to the end of February “will be lower than previously guided”. This is due to “significantly higher returns rates impacting net sales growth and costs, with continued disruption to our international delivery proposition impacting international demand, and significant ongoing pandemic-related cost inflation”.
But the firm also said that the issues “currently negatively impacting the business are primarily related to the ongoing impact of the pandemic and are, therefore, transient in nature”.
The company said that in the three months, group total net sales rose 10% year-on-year to £506.2 million, which was also an increase of 53% compared to two years ago.
By region, the UK was up 32% on the year to £320.3 million, or 78% ahead on a two-year basis. The rest of Europe however fell 12% on the year to £53.9 million, although this was a 15% rise against two years ago. The US was also down 14% at £104.6 million year-on-year, but up 36% against the same quarter in 2019. And the rest of the world was down 21% on a one-year basis at £27.4 million and down 4% on a two-year basis.
While the company’s net sales rose ’only’ 10%, its gross sales were up 28% and it also hailed the “exceptional UK demand, validating the strength of our business model where our leading proposition across price, product and service continues to resonate strongly with customers across our brand portfolio”.
But its figures were impacted, as mentioned, by returns rates that have been 12.5 percentage points higher than last year, and 7 percentage points higher than pre-pandemic levels “driven by an exceptionally high dress mix”.
Last year’s loungewear focus meant returns were lower as fit issues are less problematic with such products. Dresses, by contrast, present multiple fit problems and consumers have clearly been ordering dresses at scale in the hope of a more normal Christmas party season this year.
With the Omicron variant now running rampant in the UK and elsewhere, dresses could prove less popular and returns rates could even accelerate on the next months or so if that’s the case.
And, of course, it’s clear that while the UK is strong, the international picture is less rosy. But here, there don’t seem to be any fundamental problems linked to things like fashion miss-steps. In fact, the company said that international performance across its brands and markets was “impacted by significantly longer customer delivery times as a result of the pandemic, with all of our international sales currently fulfilled from our UK distribution network”.
And it added that “having seen strong signs of a recovery in September, revenue in Europe has declined in the latter months of the period with increased consumer uncertainty”.
Meanwhile it said that its performance in the US “has not seen the recovery previously anticipated due to the continued impact of reduced air freight capacity on delivery times to customers”.
And that cost issue referred to has been a real bugbear. Boohoo said “significant and ongoing pandemic related inbound freight cost inflation impacted gross margin in the period, down 100bps year on year. This is estimated to impact EBITDA by approximately £20 million in the financial year, the majority of which is in the second half”.
So, for the full year, the group now expects net sales growth to be 12% to 14%, compared to previous guidance of 20% to 25% growth. “This reflects our expectation that the factors impacting our performance in the period persist through the remainder of the financial year, and recent developments surrounding the Omicron variant could pose further demand uncertainty and elevated returns rates particularly in January and February”.
Adjusted EBITDA margin for the year is expected to be 6% to 7%, compared to previous guidance of 9% to 9.5%, implying adjusted EBITDA of between £117 million and £139 million.
Of course, Boohoo prospered during the pandemic and there’s always a chance it could continue to do so if the Covid situation worsens due to Omicron.
And the firm is generally confident about its longer-term future. That’s understandable given that most of the problems it’s currently facing look short term and eminently fixable.
On Thursday it said that it “remains highly confident about its future growth prospects given the exceptional growth achieved in the UK where our leading proposition across price, product and service continues to resonate strongly with customers across our brand portfolio.
“The group continues to make significant investment into its infrastructure, including progressing plans for its US distribution centre, to support its future international growth ambitions with a network capable of delivering in excess of £5 billion of net sales, and returning towards normalised growth rates of 25% per annum post-pandemic.”
And its medium-term margin guidance for 10% adjusted EBITDA margin is unchanged, “with financial performance this financial year containing costs that are pandemic-related which will unwind, as well as our investment into recently acquired brands and the Debenhams platform that will leverage as they scale”.
CEO John Lyttle said: “The strong performance in our core UK market, across both our established and acquired brands, demonstrates the potential to capture and grow market share in key markets. The group has gained significant market share during the pandemic. The current headwinds are short term and we expect them to soften when pandemic-related disruption begins to ease. Looking ahead, we are encouraged by the strong performance in the UK, which clearly validates the Boohoo model. Our focus is now on improving the international proposition.”
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