Boohoo

May 2020

Boohoo

In celebration of our fourth anniversary, this month we present our investment in Boohoo, a position we have held almost since inception. Founded in 2006, Boohoo is an online fashion retailer focused on young customers. It has designed an innovative model that we believe is best-in-class, leveraging the three major innovations in fashion retail of the past two decades:

• Fast Fashion
• e-Commerce
• Influencer Marketing

Many attractive businesses have been launched leveraging one of the above innovations. Boohoo is the only one, to our knowledge, to use all 3 synergistically and at scale. This is a powerful combination that has led to a mighty platform for fashion retail. We believe they are just getting started and are excited to partner with Mahmoud, Carol and John on their journey.

 

Fast Fashion
Boohoo is able to put a dress live on their app and website 2 to 3 weeks after it was designed. This is faster than fast fashion pioneer Inditex (owner of Zara), which takes 3 to 4 weeks to stock their brick and mortar stores with new designs. Admittedly, it is more complicated logistically to spread the same dress across a chain of brick and mortar stores than to put its picture on the website.

For perspective, traditional fashion players like Gap[1], take around 3 to 6 months to get their designs into their stores. They solve for cost and produce large batch quantities in Asia. The merchandise is then brought into their markets over container ships.

These timing differences have profound implications for the business economics. Gap, having to guess what the fashion trend will be 3 months from now, runs an extremely high risk of missing the trend and getting stuck with too much inventory that needs to be sold at loss-making discounts, if it can be sold at all. When Gap does hit the right fashions, they get sold out fast with limited ability to replenish the most popular styles. Boohoo, conversely, designs with the knowledge of what the fashion trends are now for 2 weeks from now.

It can quickly adapt to changes, start with smaller quantities and swiftly replenish the most popular styles. This allows Boohoo to sell most of its inventory at full prices and earn a good margin. It also means Boohoo’s store is full of fresh and fashion relevant offers. Gap’s margins depend on how well it guessed the fashion trends and its store can easily be filled with highly discounted merchandise that didn’t hit the years’ fashion taste.

 

e-Commerce
Boohoo has leveraged the internet to offer consumers a superior value over what they could get in a brick and mortar store:

• Wider assortment of products to choose from (See Fig. 1);
• Higher probability of having your favorite product in stock on your own size given the centralized warehouse;
• Convenience of shipping to home for free trial with easy and free return of unwanted options.

 

Fig. 1
Note: SKUs = Stock Keeping Units

 

These are early days. Consumers have been slowly migrating online. According to Fig. 2 only 16% of fashion sales in the US and Western Europe have migrated online. The ongoing Covid pandemic is accelerating this transition. A large opportunity is still ahead of us.

 

Fig. 2

Influencer Marketing
Boohoo has been a pioneer of commercial influencer marketing. It found influencer marketing was a cheaper and more effective way to acquire customers than traditional media and search-based marketing. This allowed it to have first pick in building sponsorship relationships with some of its best customers and top celebrities (including Jennifer Lopez and the Kardashians, see Fig. 3) for its target demographic. No other competitor currently comes close to match Boohoo’s influencer marketing prowess. Boohoo has funneled these marketing savings to lower consumer prices and additional profit margins.

 

Fig. 3

 

Management Team
Boohoo built a diverse management team with very complementary skills that have spikes in different core areas of its strategy:

• Carol Kane – Co-founded Boohoo in 2006 after a successful career as a fashion designer and buyer for top UK high-street retailers. She has a keen sense of fashion and marketing trends;
• Mahmud Kamani – Co-founded Boohoo in 2006 after 30 years serving several customers, including high-street fashion retailers on supply-chain issues, including sourcing, import and wholesale. He is an expert in building fast-fashion supply chains and has worked with Carol Kane for more than 20 years.
• John Lyttle – CEO since 2019 with strong expertise in scaling up fashion operations, having previously served for more than 8 years as the Chief Operating Officer of Primark Stores.

 

The Synergies of the Boohoo Strategy
Boohoo is able to use its advantages in fast fashion, online commerce and influencer marketing to build an unmatched operating model. The company constantly tests and experiments to make sure its designs are loved by its customers and influencers. It first produces small quantities of new designs and puts them live on the store. If they sell-out quickly, Boohoo places an order for a large quantity of the product. If they don’t, Boohoo scraps that design and sells the remaining pieces. This is only possible for a player that has a fast fashion supply chain, an online store (larger quantities need to be produced to stock a store network), large amounts of customers and good insight into the trend setters amongst its customer base. This test and repeat model supports Boohoo’s superior consumer offer:

• Customers always find a fresh and attractive assortment of products in the website;
• Boohoo maximizes the percentage of stock sold at full price while minimizing the inventory risk.
• Boohoo is quickly taking market share (Fig. 4) but most of the opportunity is still ahead for them.

 

Fig. 4

 

Financial Model and Performance
Boohoo has extremely high returns on its capital driven by steady attractive margins and a capital-light business model. The company benefits from negative working capital and relatively low capital investments mostly focused on its central warehouses and logistical operations.
Boohoo’s stress test came in 2018, a year that saw a warm winter that severely disrupted the industry. Cold weather arrived only by November, close to sale time around Black Friday. Most fashion retailers took material margin hits and warned on their profit outlooks. Boohoo’s profit margin barely budged and the company was able to navigate these difficult times smoothly (see Fig. 5). The same cannot be said of most peers such as Asos and Zalando.

 

Fig. 5

 

Capital Allocation and Platform Extension
Recognizing the power and profitability of the operating model, Boohoo’s management team has been steadily expanding to adjacent market segments. It started with 16 to 24-year-old females. Since then it has either acquired or launched other concepts that appeal to other demographics and fashion style preferences (Fig. 6). It is early days, but their track record is strong with their first 3 efforts (Boohoo Man, PrettyLittleThing and Nasty Gal) off to a strong start both in sales and margin performance. The return on capital invested in these efforts has been extremely high (more than 100%). We expect additional opportunities in the future.

 

Fig. 6

Boohoo aligns perfectly with Somar’s investor philosophy:

• Happy consumer – consumer delighted with fresh and attractive fashion at affordable prices and delivered quickly with easy returns;
• Thriving business – Boohoo taking market share (see Fig. 4) with several opportunities ahead;
• Profitable investment – Extremely high returns on invested capital given limited fixed investment, negative working capital and high and resilient profit margins.

Since Somar launched in 2016 the stock has been quite volatile opening very attractive opportunities for investment. We have acted on them. We have clear views of the value of the business under different scenarios. As you know we calculate these based on discounted cash-flows of our proprietary models. We will not share our views here (call us if you want more detail). As new developments occur, we may update you on this forum on the evolution of our thinking.

In the meantime, we want to thank you for your trust and Somar. Boohoo is a good illustration of our process and also of our contention that it is a great time to be an investor. There are a lot of opportunities out there. We strive to find the best consumer opportunities on your behalf.

 

Should you require any additional information, please reach me at either pedro.ramos@somarcap.com or +1.646.581.6842

 

All the best,
Pedro Ramos