Why I’d ignore the Boohoo share price and buy this 6%+ yielder instead
Over the past few years, sales growth at fast-fashion retailer Boohoo(LSE: BOO) has exploded.
From revenues of just £67m in 2013, for 2018 the company reported sales of £580m and the City is predicting revenues of just over £1bn for 2020.
To help achieve this growth, Boohoo has announced today that it is appointing a new CEO to oversee the company’s next phase of expansion.
The next stage of growth
John Lyttle, who is currently the chief operating officer of Primark Stores Limited, is stepping into the CEO role on March 15 2019.
Over the past eight years, Lyttle has helped drive turnover at Primark higher by 158%, to £7bn. The company is also changing some other management roles to “support the journey of the group through its further international expansion.”
The firm’s current joint CEOs and founders, Mahmud Kamani and Carol Kane are moving to group executive chairman and executive director respectively when Lyttle takes his place. Meanwhile, non-executive chairman Peter Williams is also stepping aside.
It looks to me as if this management reshuffle is sort of a coming-of-age marker for Boohoo. The company’s founders are taking a step back from the day-to-day management of the business and are being replaced by a manager who has more experience in managing a global fashion brand.
I reckon Lyttle’s expertise at Primark will be invaluable in helping Boohoo achieve its next stage of growth.
However, while I’m generally positive on the outlook for Boohoo, I’m not in a rush to buy the company’s shares because its valuation leaves little room for mistakes. The stock is currently trading at a forward P/E of 44, and even though earnings per share (EPS) are expected to expand 42% for fiscal 2019, this does not seem to justify the high multiple. The PEG ratio is more than one.
A better buy?
With this being the case, I’m more attracted to Pets At Home (LSE: PETS). It can’t match Boohoo when it comes to growth, but it still has an impressive growth track record. Sales have increased by 50% over the past six years, making it one of the market’s faster-growing companies.
Despite this growth, the market has recently fallen out of love with Pets because rising costs are eating into profit margins. Looking at the City’s numbers for the next two years, the company’s top line is projected to grow by around 10%, but EPS will remain unchanged.
So, what’s to like about Pets? Well, I’m attracted to the business for its low valuation. The shares are trading at a forward P/E of just 9, a world away from Boohoo’s premium multiple and giving a wide margin of safety (unlike Boohoo).
On top of the bargain basement valuation, Pets also yields 6.3% so investors will be paid to wait for the business to return to growth.
As demand for the group’s services remains high (quarterly revenue growth hit 5.3% year-on-year for the company’s latest period) I reckon it is only a matter of time before the firm’s bottom line returns to growth.
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Rupert Hargreaves owns no share mentioned. 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.
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