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We still think investors should steer clear of the business due to an expensive valuation
Thursday 04 Jun 2020 Author: Ian Conway

An entertaining if brief dust-up between AIM online fashion firm (BOO:AIM) and short seller ShadowFall Research, ultimately saw the former prevail.

However, even if strong growth is being forecast, we think investors should steer clear of the stock on valuation grounds.

Based on upgraded forecasts for the February 2021 financial year from Numis the stock trades on a price-to-earnings ratio of 66.7 times at the current 387p share price.

While the lockdown has been a boon for online retailers we think there are legitimate questions about how demand for Boohoo’s wares will hold up in an economic downturn, putting to one side recent criticisms of the company’s accounting and governance.

After landing the first punch with its sell note on 26 May, sending Boohoo shares down 7% to 338p, two days later ShadowFall was caught with a haymaker as Boohoo brought forward the buyout of its PrettyLittleThing (PLT) subsidiary, sending its shares to a new all-time high.


ShadowFall’s research note, titled Boohoo: The Catch 2022’ claimed that the fashion retailer had overstated its cumulative free cash flow by more than two thirds since 2014.

It also claimed that earnings for the majority-owned PLT subsidiary were flattered by the allocation of certain costs to the Boohoo group, resulting in an overstatement of £10.7m in profits in the last financial year.

Finally, it claimed that the inflated profits at PLT meant the cost of ongoing dividends to the 34% minority shareholders, which include the son of Boohoo’s chairman, with the cost of buying out such minorities could result in ‘a near £1bn pay day’.

Boohoo responded to the flurry of allegations by defending its definition of free cash flow and the profitability of PLT, and justifying the valuation process regarding the option to buy out the remaining stake in PLT, which was scheduled to take place in February 2022.


ShadowFall surmised that the recent £200m equity raise by Boohoo could be used, together with £241m of net cash sitting on its balance sheet, to cover the dividends paid to PLT and finance the buyout, rather than being used for growth acquisitions as per the pitch at the time of the placing.

Then Boohoo brought forward its acquisition of the remainder of PLT it did not already own. The deal worth an initial £270m, paid for 60% in cash and 40% in new shares. The transaction could eventually be worth up to £324m. 

Analysts clamoured to upgrade their earnings forecasts and price targets, enthused by the apparently value-accretive deal and Boohoo’s continued ‘opportunity set across the global fashion market’, leaving ShadowFall to retire hurt, lamenting what it called a ‘scandalous’ outcome.

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