Boohoo Group PLC (LON:BOO) shares strutted higher after Liberum upgraded the stock, citing an improvement in its key performance indicators.
Liberum raised its rating on the online fashion retailer to ‘buy’ from ‘hold’ and lifted its target price to £2.40 from £2.20.
In a note on online retailers, the broker said Boohoo has shown consistent improvement in sales retention and a higher customer lifetime value (LTV).
Boohoo also has the best ratio of LTV to customer acquisition costs (CAC) compared to its peers, Liberum said.
The LTV:CAC ratio is a key measure comparing the value of a customer over its lifetime against the cost of acquiring that customer.
READ: Boohoo.com shares drop after mixed update; sales surge due to PrettyLittleThing acquisition
“We view Boohoo as an online fast fashion version of Inditex where through a collection of brands it operates in the highly competitive youth-orientated segment of the fashion market,” Liberum said.
“While some may call into question Boohoo’s relatively high customer attrition rates, the company’s high sales retention and resultant LTV:CAC spread signals that the efficiency of its marketing spending is high enough to justify continuing to invest in acquiring customers at a strong rate.”
Boohoo boosted by Nasty Gal and Pretty Little Thing acquisitions
Liberum said Boohoo’s LTV:CAC and ROI have been driven by its higher sales retention rate and additional customers from its acquisitions of the Nasty Gal and Pretty Little Thing (PLT).
Boohoo agreed to buy Nasty Gal in February last year after snapping up a controlling stake PLT in December 2016.
Boohoo growing pains
But the broker said a key risk for the company is that it was in a relatively early stage growth compared to rivals ASOS plc (LON:ASC) and Zalando. Being at an early stage of growth naturally leads to higher levels of volatility in KPIs, Liberum said.
“An important support to its ongoing success will be continued investment to develop its warehousing and distribution infrastructure, which will account for the majority of its guided £235mln of capital expenditure over 2019-21,” Liberum added.
“This is intended to lay the platform to support a more than tripling of sales to £3bn (vs. £580m in FY18).”
Boohoo’s growing pains have been reflected by the recent decision to temporarily switch off its next day delivery option for PLT customers as part of plans for the relocation of inventory to a separate third-party managed warehouse in the first half of 2019.
LIberum expects to see little operational leverage overall as the group continues to invest behind its proposition and service.
It has forecast a three-year sales compound annual growth rate (CAGR) of 30.5% and earnings per share CAGR of 23.3%.
Shares rose 2.2% to 212p in late morning trading.