Image source: Getty Images
Before long, investors won’t be referring to the boohoo (LSE:BOO) share price. Instead, they will be talking about how the Debenhams Group stock price has performed. That’s because the fast fashion retailer will soon be re-branded.
On first hearing the news, I have to admit I thought the decision was a little strange. The last time I visited a Debenhams store (over five years ago) it didn’t sell the sort of clothes I now see on the boohoo website. And they definitely weren’t as cheap.
But on further reflection, I realise what’s going on. The group wants to move away from its fast-fashion roots — with ultra-thin margins — and re-establish itself as a more ‘middle of the road’ business.
Will this new strategy work?
The company says the economics have been proven and that the turnaround of the Debenhams brand is a blueprint for the rest of the group. It bought the name and website for £55m at the start of 2021, after the British icon, which opened its first shop in 1778, collapsed into administration.
Claiming that its Debenhams division is “fast-growing and highly profitable”, the group’s latest trading update says it generated an EBITDA (earnings before interest, tax, depreciation, and amortisation) margin of around 12% (approximately £25m) for the year ended 28 February 2025 (FY25).
However, the group has a lot of ‘I’, ‘D’, and ‘A’, which means it’s still loss-making at a post-tax level.
As Warren Buffett wrote in his latest letter to the shareholders of Berkshire Hathaway: “EBITDA, a flawed favourite of Wall Street, is not for us”. Previously, he has said: “Does management think the tooth fairy pays for capital expenditures?”
When boohoo’s numbers are finalised, it’s expecting adjusted EBITDA for FY25 of £40m.
In FY24, it was £58.6m. But after depreciation (£48m), amortisation (£28.6m), finance costs (£13m), and tax (£3.3m) were all deducted, its adjusted loss after tax was £34.3m.
I think the boohoo (or Debenhams) group is still a long way from being profitable.
A mixed reaction
And that probably explains the negative response of investors to yesterday’s (11 March) news. Since March 2020, long-suffering shareholders have seen the value of their positions fall by nearly 90%.
I’m sure the company’s done the appropriate market research and number crunching to fully understand the implications of changing its name and identity. Therefore, I have to assume that it has made the right decision to re-brand itself.
However, it still faces some major challenges.
With suppliers in 10 different countries, including dozens of them in China, the company’s vulnerable to ‘Trump’s Tariffs’. In FY24, sales to America accounted for 20% of the group’s revenue.
And I wonder if the ongoing war of words with Frasers Group (a major shareholder) could prove a distraction. The Sports Direct owner wants Mike Ashley to be installed as boohoo’s chief executive. It’s even set up a website (boohoodeservesbetter.com) to make its case. So far, it’s remained silent on the re-branding.
boohoo claims it’s going to be “leaner, faster and more technologically advanced”. And it says it’s “sharply focused on maximising value for all shareholders”. We shall see. Personally, until I see a clear route to profitability, I don’t want to invest.
This story originally appeared on Motley Fool
