Since January 2015, shares in online fashion retailer Boohoo.Com (LSE: BOO)havetripled in value. For most investors, this would representa fabulous return in a very short period of time. As the dust settles around yesterdays interim results, many may begin toask themselves whether this kind of performance can continue.
Excellent interims but
Few would fail to be impressed by the figures released on Wednesday. Revenue and operating profit soared by 40% and 135% respectively. The company has been making excellent progress in international markets (particularly the US), so much so that itnow represents 36% of total revenue.Trading has been so good that Boohoo has an enviable cash pile of just over 61m. Make no mistake, investors have a lot to smile about.
The confidence the market has in the companyis clearly reflectedin itshigh forecast rolling price-to-earnings (P/E) ratio of57. This is the sticking point. Richly valued companies usually give rise to unrealistic expectations. On a long enough timeline, disappointment is inevitable. Moreover, the mere hint of a slowdown in earnings growth can have a disproportionate effect on the price of a shareas investors fret over short-term issues. If in doubt, take a look at what happened to the shares in one of boohoos competitors,ASOS, back in 2014.
Reasons to be cheerful
Reflectingon the above, it wouldnt be unreasonable for some investors (particularly those with shorter horizons) to consider taking some profits at some stage in the near future. As such, adegree of pullback in Boohoosshare price over the next few months is possible, despite itswonderfully consistent performance over the previous 20.
That said, I remain very positive on the company over the medium-to-long term for several reasons. Firstly, it seems undeniable that pureplay online businesses will continue to steal customers away from the established high street retailers. For evidence of this, compare Boohoos recent performance with that ofNext (LSE: NXT). True, they may be focusing on servingdifferent consumer groups (for now) butthe latters decision to expand its net trading space is brave considering the current retail environment and recent results. While Next remains the best of a strugglingband(includingDebenhams and Marks and Spencer)and its shares look incrediblycheap on a P/E of just under 11, I just cant seeits fortunes significantly improving any time soon.
Secondly, Boohoo is rapidly expanding its offering by introducing clothing ranges for men and, more recently, children. Whilethe popularity of the latter will be revealed in time,I see no reason why the fast fashion formulathat has worked so successfully for itswomens range cant be replicatedgiven how ambitiousthe companys management appear to be.
Thirdly, theres the very real possibility that the company will go on to purchase Pretty Little Thing for 5m by March next year. Founded by Umar Kamani,the son of one of Boohoos founders, theformerhas been creating quite a stir on its own among its young target market.Buying and integratingthis business would further underline Boohoosintention of becoming the go-to destination forcheap, disposable fashion (and thats a compliment).
In my view, Boohoo is and will remain a class act for some time. An undeniably expensive share, but perhaps reassuringly so.
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Paul Summers owns shares in boohoo.com. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
