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Boohoo Eats $35 Million in Extra Shipping Costs

Boohoo sales climbed 20 percent to 975.9 million pounds ($1.32 billion) in the first half of 2021, but skyrocketing container shipping costs dented profits. Net income after tax dipped 66 percent to 17.8 million pounds ($24 million), or 1.38 pounds per share ($1.86 per share) for the half.

In a Nutshell:  The British fast-fashion retailer said shipping costs for the half were 26 million pounds ($35 million) higher than pre-pandemic levels, with outbound cargo inflation comprising the majority of those expenses at 20 million pounds ($27 million).

In an investor call, CEO John Lyttle said the costs of sending goods to customers by air in the U.S. had doubled over the past year, while freight rates for products coming from East Asia tripled or quadrupled.

The company cautioned that costs would continue to rise due to continued investments in its warehouses, a new London office, and marketing the new brands it acquired in February from Arcadia Group—Dorothy Perkins, Burton and Wallis.

Return rates also reverted to normalized pre-pandemic levels. During lockdowns, Boohoo benefited from customers’s penchant for casualwear, which is less likely to be returned.

In the first half, inventories soared 52 percent to 255.2 million pounds ($343.9 million) from 168 million pounds ($226.4 million), partly a factor of Boohoo integrating the three Arcadia brands, as well as Debenhams.

Gross margin dipped 40 basis points (0.4 percentage points) to 54.6 percent from last year’s 55 percent, but still remains up from the 54.3 percent in 2019.

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Boohoo opened two new distribution centers in the half in Wellingborough and Daventry, making the fashion group operational in four warehouses across the U.K. These locations include the long-established Burnley, which serves Boohoo, BoohooMan, MissPap and Debenhams; the Sheffield facility for PrettyLittleThing; Wellingborough, which now houses Nasty Gal, Karen Millen, Coast, Oasis and Warehouse; and Daventry, where Dorothy Perkins, Burton and Wallis operate.

In total, 79 million pounds ($106 million) have been invested in the locations this half, with the DCs creating more than 1,000 jobs. Boohoo is expanding the Burnley and Daventry warehouses, and equipping the Sheffield and Daventry buildings with advanced automation. The Sheffield center alone will incur 50 million pounds ($67.4 million) in capital expenditures.

The automation initiatives come as Lyttle said warehouse employees were in short supply throughout the half.

“There’s no doubt there’s a challenge…we are seeing demand on labor increasing and lower amounts of labor available than in previous years,” he added.

By their completion in 2023, the U.K. warehouses will host 62 million SKUs driving an estimated 4.7 billion pounds ($6.3 billion) in net sales.

The British company, which recently published its global supplier list in an effort to be more transparent about its supply chain and improve working conditions, is looking to expand further into the U.S. with the opening of a distribution center by 2023. The new warehouse is expected to increase capacity by 1 billion pounds ($1.3 billion) in net sales.

For the half, active customers jumped 9 percent year over year to 18.9 million. The number of orders increased 15 percent to 30.7 million, while order frequency per customer also saw a 9 percent boost to 3.09 times per year.

Although orders scaled up at the fast-fashion conglomerate, consumers are buying less, with average order value declining 2 percent to 45.41 pounds ($61.20) and items per basket dropped 7 percent to 3.2.

The conversion rate to sale reached 3.26 percent, ahead of the 3.09 percent last year.

Boohoo anticipates full-year sales growth of 20 percent to 25 percent, implying sales growth of 20 percent to 30 percent in the second half. This is down from the company’s previous estimate of 25 percent.

Due to the freight costs and distribution center wage inflation headwinds that are expected for the rest of the year, the retailer downgraded its adjusted EBITDA margin expectations to a range between 9 percent and 9.5 percent, compared the previous guidance of 9.5 percent to 10 percent as previously guided.

Reflecting ongoing investments across technology, offices and infrastructure, including the initial phase of the U.S. distribution center, capital expenditures are now expected to reach 275 million pounds ($370.6 million), slightly above the top end of previous guidance of approximately 250 million pounds ($336.9 million).

Boohoo has net cash minus debt of 98.4 million pounds ($132.6 million), as well as cash flow of 21.3 million pounds ($28.7 million). Additionally, the retailer has net cash outflow of 127.6 million pounds ($172 million) due to capital expenditures of 172.2 million pounds ($232 million) invested primarily in warehousing, office facilities and IT systems infrastructure.

In total, including debt, the Gen Z favorite ended the quarter with cash and cash equivalents of 148.4 million ($200 million).

Net Sales: First-half revenue at the e-commerce fashion retailer totaled 975.9 million pounds ($1.32 billion), up 20 percent from the 816.5 million pounds ($1.1 billion) and up 73 percent from the 564.9 million pounds ($761.3 million) brought in two years ago.

In the U.K., year-over-year sales increased to 569.6 million pounds ($767.6 million), a 32 percent increase. Internationally, sales jumped 5 percent to 406.3 million pounds ($547.6 million) from 386.3 million pounds ($520.6 million).

For the second quarter, Boohoo’s sales slowed down to 9 percent growth to 489.8 million pounds ($660 million). U.K. sales improved 19 percent to 295 million pounds ($397.6 million), while international sales held the retailer back, dropping to 194.8 million pounds ($262.5 million) for the quarter, down 3 percent from 201.5 million pounds ($271.6 million) in the year-ago period.

Net Earnings: Pre-tax first-half income for Boohoo was 24.6 million pounds ($33.1 million), a 64 percent decline from the 68.1 million pounds ($91.7 million) taken in last year. After tax, net income plummeted 66 percent to 17.8 million pounds ($24 million), or 1.38 pounds per share ($1.86 per share) for the half.

Adjusted EBITDA was 85.1 million pounds ($114.6 million), down 5 percent from the 89.8 pounds ($120.9 million) reeled in during the 2020 period. As such, adjusted EBITDA totaled 8.7 percent of revenue, down from 11 percent in the prior first half.

Adjusted diluted earnings per share for the half were 3.84 pounds ($5.17), down 15 percent from the 4.53 pounds per share ($6.10 per share) in the year-ago period.

CEO’s Take: Despite the profit pressures from the supply chain, Lyttle remained optimistic about Boohoo Group’s future given its slew of acquisitions and the expected uptick in holiday spending.

“All those events that basically didn’t happen last year will benefit all of our brands,” Lyttle said. “Two years ago, we catered to 16-24 only with our younger fashion brands. The new brands we’ve acquired open up our addressable market from about 100 million people to 500 million.”