Cube Midcap Report (17 June 2020) – Boohoo juggernaut rolls on

Cube Midcap Report (17 June 2020) – Boohoo juggernaut rolls on

Good morning!

I’m going to be live-streaming my thoughts on the markets here at midday. I feel woefully unprepared but I guess that will add to the entertainment factor for you:

In macro, the FTSE continues to confound everybody. We are approaching 6300 this morning.

VIX is slightly lower at 34. Remember that this is still an extreme level (range was 11-19 pre-Covid).

Today I’m thinking about:

  • Boohoo
  • Domino’s Pizza
  • Wlliam Hill
  • Kingfisher

Finished at 8.20pm. I thought I had already uploaded the final version earlier.


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Market cap £5.3 billion
RNS Trading Update
Writer disclosure No position

The momentum behind this stock is incredible.

The bears (Matthew Earl et al) could have picked an easier target, as noted in my analysis at the time of the short attack.

Today’s update shows that Q1 was another huge revenue performance. At constant FX rates, core UK revenue increased 30% and USA revenue increased 83%:

Margins – up 60 points to 55.6%. This is particularly impressive since there has been deflation in the clothing industry as many retailers dumped stock. Too good to be true? I hope not.

The most intriguing trend at present is Boohoo’s ability to acquire other brands (online-only) and put them on boohoo’s platform. MissPap, Karen Millen and Coast are all said to be trading strongly.

Two new brands are bolted on to the boohoo juggernaut today: Oasis and Warehouse.

The purchase price, relative to Boohoo’s market cap, is almost zero (just £5 million).

The assets being purchased are “the online businesses and all associated intellectual property“, i.e. none of the legacy assets which are more trouble than they are worth.

The aggregate trailing online revenues being purchased are £46.8 million. Paying a little over 10% of sales – doesn’t sound like an expensive valuation to me. If the sales can be made higher-margin, then plenty of value could be created:

In line with previous acquisitions, the Group will, in the coming months, integrate Oasis and Warehouse onto its platform, allowing both brands to benefit from the Group’s insight, infrastructure, supply chain and operating model.

Cash – finished the quarter at the mighty level of £350 million+.

Outlookahead of market expectations”.

I must note that Boohoo failed to provide any guidance at its final results in April, and again refused to provide guidance at the time of the fundraising in May.

This somewhat calls into doubt the idea that Boohoo can claim to be “ahead of expectations”.

Revenue growth is anticipated to be approximately 25% for the current financial year, with an adjusted EBITDA margin of 9.5% to 10%.

Comparing this to the pre-Covid trading update in January, it’s roughly in line with what Boohoo said its medium guidance would be: sales growth of 25% p.a. and 10% EBITDA margin. Note the slight reduction in EBITDA margin. I wonder why?

My view

I think the bears are in a very tricky spot, as they have shorted a company which is solvent (very cash-rich and comfortable financially), growing rapidly and with strong momentum behind the shares.

I agreed with them on many points (the list can be seen here). In particular, I agreed with them that BOO shares were probably overvalued, and that the future acquisition of prettylittlething from the founder’s son was an important risk factor.

But that risk factor got removed by the swift closure of a deal at £270 million, plus £54 million of contingent consideration.

There is another risk factor in the form of I Saw It First, a small competitor owned by the founder’s brother. I’m not sure how important this is – maybe not very? Maybe it will be bought up by boohoo in future, at who knows what price?

My overall view is that I have no desire to be long or short of BOO, and I never have been long or short of it.

Reasons not to buy: The valuation is too rich for me, and the Kamani familial web is a concern.

I also prefer pure organic revenue growth by powerful standalone brands, if possible, rather than growth by bolt-on acquisitions. Revenue growth at the core boohoo brand is no longer impressive.

Reasons not to short: I believe that its profits are real, that it’s balance sheet is healthy, that it’s adding value to its acquired brands by putting them into a more powerful web platform, and that it can continue to motor ahead in this way for the foreseeable future.

Overall, therefore, I am very happy to have no position in BOO. Good luck to those on either side of the trade.


Domino’s Pizza

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Market cap £5.3 billion
RNS AGM Trading Update
Writer disclosure No position

This RNS talks a lot about sales, but it’s the bit about costs that has grabbed the market’s attention.

UK like-for-like sales (excluding stores where the territory gets split up with a new store) were up 4.8%.

Including splits, like-for-like sales were up 3.7%. I think it’s useful to look at both numbers, with or without “splits”.

Ireland performed much worse, in negative territory – due to a bigger economic impact of Covid-19.

Some detail on performance is provided. Some insight into consumer behaviour during lockdown:

this increase in sales from delivery more than offset the lack of sales from collection, however total order count has declined during the period. We have also seen a change in consumer purchasing behaviour and average basket composition, with a higher proportion of sides and desserts, which, whilst aiding our sales performance, has impacted our margins.  

So people aren’t collecting, but they are ordering more from home. Unfortunately for Domino’s, the increase in the order size is coming from more sides and desserts, rather than pizza. So margins take a hit.

Now for the really bad bews. There have been significant incremental costs:

These include re-routing all store deliveries to stop two-person deliveries, ensuring all stores are closed during restocking, changing our supply chain shift patterns and paying salary premiums.

In addition, menus have been changed, food collection methods has been changed, there are contact free delivery boxes, face masks, etc.

All of these costs “more than offset the benefits from the increased sales“. EBITDA will be down year-on-year.

Guidance – none provided.

My view

I’ve been reading this afternoon about possible changes that could be introduced in hospitality businesses. It’s hard to know how much all of this will cost – and I am wondering how many pubs and restaurants will be viable under these conditions. Not many?

It’s a stark warning when even a delivery/collection business like DOM is seeing its earnings fall.

Personally, I own DP Eurasia (DPEU) but wish I had owned this much safer incarnation of the Domino’s brand over the past couple of years. It’s been on the watchlist for a while and will remain there. Big fan of the franchise model.

The major downside with this one is the lack of exciting growth.


William Hill

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Market cap £1,150 million
RNS Proposed Placing

Results of Placing

Writer disclosure No position

William Hill has tapped the markets for just below 20% of its existing share count.

169 million shares have been placed at 128p – an almost 8% discount price to yesterday’s close. Gross proceeds are £224 million.

In my most recent article, I thought WMH would probably pass its relaxed covenant test in June 2021. The covenants were due to get tougher in December 2021 and June 2022. Net debt was £536 million.

This fundraising washes away concerns for the time being.

Company comment:

The net proceeds of the Placing, together with the VAT refund, will reduce the Group’s financial leverage and provide a more robust balance sheet. We are focused on strengthening the balance sheet as we invest in growth and on achieving a net debt/EBITDA ratio of between 1-2x as trading conditions stabilise.

WMH also talks about its plans to invest further in the US, but I don’t think there’s anything new in that. The point is that without the fundraising, it would have been constrained in its ability to execute on its plans.

My view

It’s a material amount of dilution for existing shareholders but it surely has to be worth it, if it means that WMH doesn’t have to worry about breaching bank covenants and has a normalised balance sheet?

I have no plans to invest in this one but I suspect that it will be more attractive, to new investors, after this fundraising.



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Market cap £4,555 million
RNS Final Results – Part 1 of 2

Final Results – Part 2 of 2

Writer disclosure No position

Just a quick word on this. I see that Kingfisher has recognisd £450 million of “exceptional items”, resulting in a huge reduction in statutory operating profit.

I’ve highlighted a few of the biggest ones from the past two years in this table (right-hand side is 2018/2019):

As you can see, this company has become very familiar with large exceptional items.

Even on an adjusted basis (i.e. excluding all of the above), the results aren’t very pretty. Lower sales (down by 1.5%) and gross profits (1.4%), combined with large fixed costs, help to create a 5.2% decline in adjusted PBT.

Adjusted ROCE is 8.6%. If that number was derived from the statutory results, it would be at an acceptable level for me.

Not a company I want to spend much time on, but just thought I should mention it.



Calling it a day there – dinner is ready. See you tomorrow!




Wordpress (9)
  • comment-avatar

    Unfortunately this didn’t work for me – probably my broadband speed at fault. Any plans to convert it into a podcast so I can listen whilst I walk?

    I can’t fathom how to download onto my android phone whilst in wi-fi mode so I can then listen without chewing up all my data allowance on my phone when no wi fi available.

  • comment-avatar

    “and the Kamani familial web is a concern” – and yet so many great investors say that in companies where founders who are also big shareholders most often make the best investments.

    No, I didn’t much like it when they bought out only 2/3rds of PLT whenever that was but the eventual price of the remaining 1/3rd could easily have been much higher (and I was expecting it to be).

    They’ve certainly made a good start monetising the Nasty Gal purchase and sounds as though they are with Karen Millen & Coast. I can’t see why they shouldn’t with Oasis and Warehouse which are already good names and surely a good buy at whaty they’ve paid.

    I’m staying on board as I expect the story to continue unfolding.

    • comment-avatar

      Thanks for the feedback L. I do like a family business but it has to be run equally for the benefit of all shareholders. I’m not saying that hasn’t happened at BOO, but it’s easy to be suspicious given events at PLT.

  • comment-avatar

    Quality definitely got better and managed to listen in on my phone with video set to the lowest resolution to hopefully keep data useage tolerable.

    Excellent Graham – definititely try and do them regularly.

    In answer to one of your questioners regarding safe place to put some money with some return – they could try Premium Bonds. They could earn nothing or they could earn big. You can get at your money really quickly if you want it and it’s as safe a place as you can get (definitely safer than under the bed).

    I’m not an IFA either but, there are bonds or preference shares out there paying around 6%. Obviously there is some risk but I certainly wouldn’t call them all “junk”.

  • comment-avatar

    Thank you Graham. Appreciate your video, for me a regular and shorter would be a perfect addition to your web. Having an option to ask relevant questions to RNS is very usefull. It will take some time but I can see interaction as a big adventage to your cubeinvestments.

  • comment-avatar

    I cant believe that BOO can be doing so well compared to competitors . Are people sure its not creative accounting like Quindell and all these other past train wrecks . Why an earth would people be buying so much stuff while on lock down with reduced disposable income ? It just does not feel right to me .

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