Boohoo.Com (LSE: BOO) shocked the market yesterday byissuing a profit warning, only three months after reporting that itwas on-track to meet full-year expectations.
Management now expects full-year profit to be around 26% lower than initially predicted, as a marketing push failed to deliver the level of sales growth expected.
However, during the ten months to 31 December, the companysEuropean operations reported top line growth of47% and over the year Boohoos gross margin increased by 0.3% to 59.9. So it wasnt all bad news.
But after slumping 40% after yesterdays announcement, is now the time to buy Boohoo?
Initial predictions
Initial City figures suggest that Boohoos earnings per share are set to come in at around 0.83p for this year, a full 33% lower than initially expected. These figures have been put out by analysts despite managements own prediction that full-year profit will be 26% lower than previous forecasts. Previous forecasts were calling for the company to report earnings of 1.19p per share this year.
It is also reasonable to assume that Boohoo will report lower-than-expected figures next year as well. At present, the City is predicting earnings per share of 1.6p for 2016. Reducing this figure to reflect a 33% reduction in profitability gives a projected 2016 EPS figure of around 1.1p.
So, based on these figures, even after yesterdays decline, Boohoo is trading at a forward P/E of 20.
Still, a forward P/E of 20 is high, but not overly demanding for a growth company like Boohoo.
You see, even though Boohoo warned on profits yesterday, the company reported organic sales growth of 25% during the period, despite the UKs challenging retail environment.
Further, even though the group is investing heavily in its core operations and marketing, Boohoos cash balance is growing. The companys cash balance currently stands at 60m, around 5.3p per share, which gives some downside support if things go catastrophically wrong.
Additionally, even using lower growth estimates, Boohoos earnings are expected to expand nearly 40% during 2016, which gives a PEG ratio of 0.5.
Risks ahead
Even though Boohoos high valuation can be justified, risks remain. For example, at present levels the company is trading at a high P/E and theres no book value support. Whats more, the company has already warned on profits once, theres no reason to suggest that this wont happen again.
Overall, Boohoo is a risky bet. The companys high valuation can be justified if the group can hit its targets. If not, theres very little to stop the shares falling another 50%.
Nevertheless, only you can decide if Boohoo fits in your portfolio and I thoroughly recommend that you do some additional research before making a trading decision. And if you do decide to buy Boohoo, a basket approach will work best.
Basket Approach
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
