Top UK Stocks Boohoo shares plunge as rising costs weighs on profits

Boohoo starts to feel the pressure from rising costs, Diageo grows confident as hospitality reopens, Virgin Money set to close branches as it goes digital, Avation’s fleet loses value amid the pandemic, and Firstgroup’s US bus division receives financial support.

Top News: Boohoo sales soar but higher costs prompt lower guidance

Boohoo missed expectations in the first half as a surge in costs weighed on profitability and margins, prompting the online fashion retailer to downgrade its guidance for the rest of the year.

Boohoo shares were trading 7.6% lower this morning but had sank over 16% in early trade.

Revenue rose 20% in the six months to the end of August to £975.9 million from £816.5 million the year before, coming in short of the £1.05 billion expected by analysts. Boohoo said it has doubled its market share in both the UK and the US over the last two years, with overall sales running 73% above pre-pandemic levels.

Boohoo also posted a surprise drop in adjusted Ebitda, which was down 5% at £85.1 million. Analysts had expected Ebitda to jump 11.9% from the £89.8 million delivered last year. Pretax profit at the bottom-line plunged almost two-thirds to £24.6 million from £68.1 million, also falling far short of the £62.3 million forecast.

Boohoo said Ebitda was down from the exceptional levels of profitability seen last year when demand exploded during lockdown. Importantly, Ebitda was still some 40% higher than pre-pandemic levels seen in 2019.

‘Profitability was impacted by a number of cost headwinds driven by short-term factors largely relating to the pandemic and our investment as we scale our newly acquired brands. These include: increased marketing investments in key markets and our new acquisitions, two warehouse operational moves, returns rates normalising and materially higher shipping costs,’ said Boohoo.

It said it spent an extra £26 million on increased shipping costs alone in the period. It also spent a record £172 million in capital expenditure during the period, investing in the likes of additional warehouse capacity and the digital relaunch of its newer brands such as Debenhams. It said it plans to build a new distribution centre in North America in 2023.

Boohoo said demand has accelerated since the end of the period, with notable upticks in the UK, Ireland and France throughout September. Boohoo said it is still expecting to deliver full year sales growth of 20% to 25%, implying second half sales will grow by 20% to 30%.

However, the additional cost pressures prompted it to lower its adjusted Ebitda margin target for the full year to 9.0% to 9.5% from its previous target of 9.5% to 10.0%. That came as Boohoo raised its annual capex budget to £275 million from £250 million, mostly to reflect the extra investment being made through its new distribution centre.

‘The COVID-19 factors impacting Ebitda this financial year are expected to normalise over the medium term. Recent inflation in freight, logistics, and labour costs are expected to reduce from elevated levels in time, particularly as the group invests in its own infrastructure through implementing more advanced automation in its existing distribution centres, global travel capacity increases and our first global distribution centre opens in North America,’ Boohoo said.

 

Diageo remains confident as on-trade continues to recover

Diageo said it has made a ‘strong start’ to its financial year as the off-trade market remains resilient and the on-trade continues to bounce back after being hard hit by the pandemic.

Diageo shares were up 2.4% this morning at 3651.2p – marking a fresh all-time high for the stock.

The alcoholic drinks giant, which owns the likes of Guinness and Smirnoff vodka, provided an update ahead of its annual general meeting today and said its North American business was ‘performing strongly’ while Europe was ‘recovering ahead of our expectations’. Meanwhile, its businesses in Africa, Asia, Latin America and the Caribbean are ‘performing well’.

Diageo is currently investing in marketing in North America to underpin its long-term growth and said the improvement in Europe has been down to a faster-than-anticipated recovery from the on-trade as pubs and hospitality venues reopen. It warned the volatility hitting other regions is expected to continue going forward, and also said its businesses selling drinks in travel hubs like airports continues to be disrupted.

‘We expect organic operating margin to benefit from a further recovery in sales volumes, positive channel mix and premiumisation trends, while we are continuing to invest in our marketing and commercial capabilities. As previously indicated, we are managing rising inflationary pressures, which are partly due to supply chain constraints,’ said Diageo CEO Ivan Menezes. 

‘I am pleased with how our business is performing and I remain confident in our ability to deliver long-term sustainable growth and shareholder value. We will continue to do business in the right way, from grain to glass, for all our stakeholders,’ he added.

 

Virgin Money to close one in five branches in digital push

Virgin Money UK said it is ramping-up spending as it accelerates plans to become the ‘UK’s best digital bank’ as it looks to close stores, improve automation and provide staff with more flexibility.

The bank said people were proving more willing to self-serve their banking needs digitally as the economy recovers from the pandemic, prompting it to accelerate investment in digital initiatives.

This will see it close 31 of its 162 stores and book a one-off restructuring charge worth £25 million in the fourth quarter. It will spend an additional £20 million tweaking its ‘Life More Virgin’ model to ‘give colleagues greater flexibility around working patterns and location, seeking to support colleagues to achieve a better work-life balance and boost well-being and productivity.’

Virgin Money is also looking to simplify its IT and move to a cloud-based infrastructure to streamline and automate processes.

‘As a result, restructuring charges for FY21 are now expected to be £145 million in total with an additional £45 million booked in Q4, as the group launches the initial actions in order to deliver on its strategic ambition to be the UK's best digital bank,’ Virgin Money warned.

‘The steps announced today are the first phase of the acceleration of Virgin Money UK's digital strategy, which will drive further productivity gains and build capacity for ongoing re-investment, further digitisation and in time, greater cost efficiency,’ it added.

Virgin Money said it plans to funnel any funds freed up through its cost-saving plans into its new digital investments and that it plans to ‘leverage the capabilities of its key strategic partnerships’ – naming Global Payments and Capita specifically.

A further update will be provided when it releases its full year results.

Virgin Money shares were down 1.6% this morning at 210.85p.

 

Avation sees pandemic weigh heavily on fleet valuation

Avation said the pandemic has drastically hit the valuation of its fleet, causing it to book significant impairments during the recently-ended financial year that pushed it into the red.

The aircraft leasing firm said revenue was down 3% in the year to the end of June at $117.7 million as a result of the pandemic severely weighing on demand for travel.

The drastically different environment for airlines has forced Avation to book a hefty impairment against the value of its fleet. Avation said it has booked $87.4 million in impairments – a huge jump from the $32 million figure provided a couple of months ago – in addition to $25.4 million in expected credit losses.

Avation booked a pretax loss of $70.2 million in the year, turning from a $14.6 million profit last year. Still, despite a larger level if impairments, the loss was better than the $80.5 million forecast by analysts.

‘The year ended 30 June 2021 has been the most challenging in the company's history. The Covid-19 pandemic persisted throughout the year disrupting airlines, aircraft leasing and aircraft valuations,’ said executive chairman Jeff Chatfield.

‘An end to the pandemic appears to be in sight with the rollout of global vaccination programmes supporting a return to growth in passenger numbers. A return of air travel to pre-COVID levels may result in an increase in the value of aircraft that could reverse some of the impairments in future periods,’ he added.

Notably, Avation said the voluntary restructuring filed by one of its customers, Philippine Airlines, should resolve ‘one of the last remaining lease defaults’ caused by the pandemic on its fleet.

Avation said it is still concentrating on preserving liquidity and cash, having cut costs, halted investment and suspended dividends.

‘Avation's cash and liquidity position is expected to improve in the coming months through the expected sale of underutilised aircraft and the receipt of distributions to creditors from the restructuring administrations of Virgin Australia and Philippine Airlines. This will have the combined impact of improving operational efficiency and increasing liquidity which can then be used to continue to pay down debt and fund a return to fleet growth planned for late 2022,’ said Chatfield.

Avation shares were trading broadly flat this morning at 108.0p.

 

Firstgroup sees Greyhound receive US government financial support

Firstgroup said its Greyhound subsidiary has received $84.6 million in economic relief from the US government and is expected to secure further support going forward.

Greyhound is a national operator of intercity coaches across the US and also in parts of Canada. The funds received have come from the Treasury’s Coronavirus Economic Relief for Transportation Services scheme, also known as CERTS.

Firstgroup said Greyhound is set to receive more financial support but said this will be around one-fifth of the size of this first tranche. That implies the second tranche will be around $16.9 million and is expected to be issued ‘shortly’, Firstgroup said.

The funds must be used within 12 months and at least 60% must be used to fund ‘ongoing qualifying payroll costs’. The remainder may be used for the likes of operating costs and maintenance work.

Notably, Firstgroup said Greyhound also remains eligible to secure more funds from other US federal schemes like the CARES Act, which provides funds to state agencies to maintain intercity buses running, and the American Rescue Plan, which aims to mitigate losses until CERTS funding is put in place.

Importantly, Firstgroup is trying to sell Greyhound and classes it as a non-core operation.

Firstgroup shares were up 1.4% this morning at 88.7p.

 

Share buybacks to watch

A number of companies issued news around share buybacks this morning.

Kingfisher said it will return up to £75 million by repurchasing shares during October and November, marking the first tranche of the £300 million programme launched earlier this month. The firm will be cancelling the shares bought and clarified it will not be repurchasing any of its American Depositary Receipts (ADRs).

Ferguson is kicking off the first tranche of its new $1.0 billion share buyback earlier this month which will see it spend $290 million on repurchasing shares by January 13, 2022. Shares will be cancelled, but Ferguson flagged it will need to secure additional permissions from shareholders in order to complete the full share buyback programme over the next 12 months.

CRH said it has completed the latest phase of its buyback programme worth $300 million. It purchased 6.0 million shares between the end of June and September 27, taking the total it has returned since May 2018 to $2.6 billion. CRH has launched the next phase, also worth $300 million, today that will end by no later than December 23. Shares are being repurchased on Euronext Dublin and being cancelled.

Pennon said it has returned £60 million through buybacks between July 23 and September 10 as part of its programme that was launched in June. That was the first phase of a £400 million scheme, and Pennon said it has now launched the second phase worth another £60 million. This phase will end no later than November 26 and all shares will be cancelled.

 

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