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Why is the Boohoo share price up today and would I buy the shares?

Zaven Boyrazian
·3-min read
Man in a clothing store in a medical mask because of a coronovirus.
Man in a clothing store in a medical mask because of a coronovirus.

The Boohoo (LSE:BOO) share price is climbing following its latest announcement. The online fashion retailer has acquired Debenhams in an all-cash acquisition for £55m. With VAT, the total cost comes to around £66m.

But does this acquisition make sense to me, did Boohoo pay a fair price, and would I buy?

Boohoo buys Debenhams

Since Boohoo is an online retailer, it has little need for physical stores. So the Debenhams properties are not included in this deal. But what is included is the Debenhams brand, additional intellectual property, and customer data. In my opinion, the latter is where the real value lies.

The Debenhams website has over 300 million annual visits. That makes it one of the top 10 online fashion stores in the UK. And now, all of those visits and, more importantly, customers belong to Boohoo.

In 2020 Boohoo made £1.23bn in gross revenue. Combining that with Debenhams’ online revenues of £400m represents a 33% boost in top-line income. The management team has stated the acquisition presents a “fantastic opportunity”. Given these figures, I’d agree.

But the acquisition is certainly not without risk. Around a quarter of Debenhams revenue originates from its beauty and homewares segments, neither of which Boohoo has any significant experience in. This could become a serious problem that will affect the Boohoo share price if, for instance, it’s unable to successfully maintain relationships with premium beauty brands and its marketplace ambitions come to fruition more slowly than expected.

Inspecting the acquisition price

Overall Debenhams generated gross revenue of £1.52bn in 2020 from both its physical and online stores. But only around £12.7m was underlying profit. Needless to say, that’s, a pretty terrible operating profit margin of less than 1%. That’s another risk.

But Boohoo does start with an advantage. It doesn’t have any physical stores and doesn’t have to pay large rental fees. And as an online pureplay, nor did it need to borrow money to acquire any physical locations in the first place. As a result, it operates with a significantly higher margin of 7.4%.

If (and it’s a big ‘if’) all of Debenhams’ online revenue can be absorbed without loss. At a 7.4% profit margin, the underlying income would be around £29.6m. And since Boohoo only spent around £66m for the business, it has essentially paid a P/E ratio of 2.23. That looks cheap to me!

Inspeciting the boohoo share price
Inspeciting the boohoo share price

Is the Boohoo share price too low?

That being said, Boohoo has a lot of challenges ahead of it. Even at the low price it paid for Debenhams, it doesn’t change the fact that Covid-19 has created one of the worst business environments for fashion. Not to mention integrating such a large business into its platform is going to create complications, at least initially.

However, if a smooth and successful integration is achieved, then the current Boohoo share price looks quite undervalued in my eyes. Given the growth potential this acquisition offers, I think the risk might be worth the reward. Therefore at the current price, Boohoo is a stock I would consider adding to my portfolio.

The post Why is the Boohoo share price up today and would I buy the shares? appeared first on The Motley Fool UK.

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Zaven Boyrazian does not own shares in boohoo group. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021