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boohoo won’t be a ‘buy’ until ESG troubles are clear, says City broker

boohoo Group PLC (LON:BOO) won’t be a stock to ‘buy’ until it can “adequately” deal with its ESG issues, a City broker said.

The AIM-listed retailer is looking to rectify past problems, but the market will need greater clarity on how implementing an ethical sourcing and supply chain model or penalties for past breaches can affect the balance sheet.

READ: boohoo expects revenue growth to slow down as trading normalises after pandemic

“The share price resurgence suggests that investors have put the supply chain issues behind them, and sales growth suggests no impact from any consumer activism. While the continued strong financial performance suggests a ‘buy’ rating, we remain cautious,” analysts at Liberum commented.

Investors are also waiting for bosses to link financial rewards to the sustainability targets, and the online giant confirmed that discussions have been had and further details will be shared in the annual report due out later this month.

“This is the crucial part of the jigsaw,” noted AJ Bell.

“The businesses existing customers might not have been put off by the businesses supply chain failings, but Boohoo is diversifying. Its integration of brands like Debenhams will require it to attract a new shopper. Price is undeniably important but as retail reopens and competition intensifies the story behind the brand will become ever more important. Splashing out should make customers feel good about their purchases; giving them one more reason to feel the glow has to be excellent for business.”

Meanwhile, analysts at Peel Hunt said there is a big opportunity for a ‘normalisation’ boost in sales as consumers come out of lockdown and start socialising, holidaying and going out, although carriage and freight costs will remain high.

In fact, they reckon boohoo’s guidance for 25% revenue growth in the year to February 2022 is “rightly conservative”, though it sits behind current market expectations.

Adjusted underlying earnings (EBITDA) will be weighted towards the second half of the year, the fast-fashion group said, reflecting a strong comparative period in the first six months.

The acquisitions of Debenhams, Dorothy Perkins, Wallis and Burton are forecast to deliver 5% revenue growth in the current financial year, though they will dilute adjusted EBITDA margin which is expected to be 9.5-10%.

Revenue in the year to 28 February 2021 climbed 41% to £1.7bn as people turned to online shopping while shops were closed during lockdowns.

Looking ahead, the AIM-listed retailer said this trend is set to wind down and also noted that carriage and freight costs will remain high.

Shares dipped 1% to 322p at midday.

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