RBC has slashed its target price for online clothing retailer Boohoo.com PLC (LON:BOO) to 125p from 160p, saying it does not think current levels of growth are sustainable.
In a note to clients, the Canadian bank said: “We do not think Boohoo's customer proposition is competitive enough to sustain higher levels of growth, not least without significant investment.”
READ: Citi tells investors to take a punt on Boohoo after recent share price slide
RBC also retained its ‘Underperform’ rating on the stock, adding: “We continue to see 15% earnings downside risk and retain our Underperform rating. At our lowered PT of 125p (from 160p), the shares would trade on FY19e 1.7x EV/Sales - a multiple we believe is fair given the less attractive longer-term growth prospects, in our view.”
“In light of the highly competitive nature of the industry and Boohoo's lower ranking in our Internet Framework, we believe Boohoo needs to invest further in establishing defendable competitive moats.
“We therefore anticipate a margin re-set driven by price investments, rising customer acquisition costs and enhancements to enhance the proposition, particularly around delivery, where Boohoo is less competitive than its peers.”
The bank’s analysts said they saw one of two scenarios developing: “(1) Management choosing to invest in margin to improve the proposition across its brands and international markets, thereby prioritising top-line growth. This is reflected in our forecasts.
“(2) Management choosing to protect profit margins at the expense of superior top-line growth, which we believe could potentially drive a greater stock de-rating.”
Boohoo shares were down 2.1% at 144.6p in mid-morning trading Wednesday.