As the novel coronavirus washed up on the shores of the United Kingdom, high-street retail stores closures intensified across the nation. The detrimental consequences for these retailers further affected the investor sentiment, at a time when the pandemic is blowing out of proportions.
The stock markets had undergone steep corrections and recently recovered to some extent. However, the threat of a second wave of the pandemic is always there, due to a consistent rise in the number of Covid-19 patients across the globe. The markets are still volatile and are starting to find some footing as the economy is reopening gradually. The British government had launched several bailout packages for the businesses to help them stay afloat during the unprecedented crisis; many of them proved beneficial for high-street retailers in the UK.
The companies with resilient business models, seem to be trading at lower levels and hold the high possibility of improvement in the times to come. However, not all such stocks can be a great punt to deliver huge returns, as it depends on several other factors.
Here we have a lens through two non-essential retail stocks, Boohoo Group Plc (LON: BOO) and Burberry Group Plc (LON: BRBY), which have resilient business models and seem to be trading at lower levels.
Boohoo Group Plc
Manchester based, fashion retailer, is endorsed by well-known celebrities such as Kim Kardashian. The fashion retailer is known for its cost-effective pricing, offering products which are specifically targeted for women. The budget fast-fashion company sources nearly 70 per cent of its stock from local vendors in the UK, which is its competitive advantage. Boohoo uses social media platforms along with celebrity fashion market to identify designs with maximum traction and puts them up for sale within weeks. Boohoo Group has yielded a double-digit CAGR return in terms of revenue, which was up by 58.56 per cent during the last four years. The Company's statutory revenue surged from £195.39 million in FY16 to £1,234.88 million in FY20.
In the pre-crisis era, the fashion retailer has always been in the money. The company’s revenue was up by 44 per cent to £1,234.9 million in the fiscal year 2020. The company’s profit before taxation was up by 54 per cent to £92.2 million in 2020. If £10,000 was invested in Boohoo Group on 1 July 2019, it would have translated to £19,443.13 on 30 June 2020, which implies a price return of 94.43 per cent in a year’s time.
During the unprecedented crisis, when most of the businesses are relying on government aid to stay afloat, the FTSE AIM listed group has achieved a 45 per cent growth in revenue during the first quarter of 2021 on constant exchange rate basis to £367.8 million driven by robust underlying growth through its online platform across its several brands.
The company owned brands ‘Pretty Little Thing’ and ‘Nasty Girl’, have been doing quite well. The company has recently acquired ‘Warehouse’ and ‘Oasis’ and would be integrating it with the online platform soon.
Recently, the fashion retailer was criticized for risking the coronavirus spread in Leicester, a city in England. The garment workers' rights group condemned the group for exposing its workforce to the risk of the novel coronavirus during the lockdown period. According to a report by Labour Behind the Label, the suppliers of Boohoo, allegedly forced their workers to work in factories, despite having corona infection. These factories did not practice the social distancing guidelines and were operational during the national lockdown. Due to recent surge in the number of Covid-19 infections, the British government has extended the national lockdown beyond 4 July in Leicester, which happens to be one of the major hubs of garments and clothing in the UK.
Boohoo trading operations were carried out online. The company received a steady number of orders which translated into a 45 per cent growth in revenue during the unprecedented crisis induced by Covid-19. The garment workers' rights group claims that to serve the sustained number of orders procured by Boohoo group, the suppliers kept the garment factories operational during the lockdown.
Labour Behind the Label group has also alleged the fashion retailer of being involved in a furlough scam. The company is making inflated claims through the job retention scheme launched by the UK government and has asked its workers to hide their payslips.
The situation got worse for the AIM-listed fashion retailer as online multi retailers have removed all Boohoo branded clothing from the sale. Next Plc, Asos Plc, Amazon UK, very.co.uk and Zalando have all removed Boohoo’s product from their online platforms amid Leicester factory allegations.
Boohoo group would be initiating an independent investigation on its supply chain in the wake of the allegations made. The stock price of Boohoo, which was hovering around GBX 400 per share on Thursday, last week plummeted by nearly 44 per cent on the news. Though, the company has carried its last year momentum in 2021, and the Group expects to deliver strong, profitable growth of 25 per cent in revenue in the current financial year (2021). The stock was trading at GBX 296.50, up by 32.07 per cent (11:15 AM GMT) on 9 July 2020.
Burberry Group Plc
The FTSE 100 listed group is a fashion and accessories retailer. The luxury brand’s reported operating profit was down by 57 per cent to £189 million due to adjustments made with respect to asset impairments charges in anticipation of the economic impact brought by the pandemic. However, the revenue was down only by 4 per cent at constant exchange rates (CER) to £2.6 billion in the fiscal year 2020. The company was still able to offer dividend for its shareholders, which stood at 11.3 pence per share in 2020. This proves the resilience of the company’s business model.
During the lockdown, most of the stores of the company were closed, which caused a major impact on the financial performance of FTSE 100 listed luxury fashion group. The dividend-paying stock has witnessed a steep price correction as it slumped by nearly 18 per cent in a year’s time, which had brought down the stocks to an affordable level. The company has a strong balance sheet with headroom for finetuning its business model to leverage upon online platforms for customer acquisition and servicing while conserving cash and reducing operating costs. The company is trying to improve its presence across social media platforms to gain customer attention. The company is also focusing on focus on environmental issues which appears to be resonating with the environmentalists and campaigners. The stock was trading at GBX 1,595.50, up by 0.31 per cent (11:20 AM GMT) on 9 July 2020.
The British government allowed the reopening of the sector, which would certainly lead to improved trading conditions. Several support schemes launched by the government continue to help the companies with this storm. Whatever, individual hiccups they are facing are momentous only and are not likely to have any long term impact on the fundamentally sound companies.