Broker tips: Boohoo, AO World

(Sharecast News) - Analysts at Berenberg downgraded fast fashion retailer Boohoo from 'buy' to 'hold' on Tuesday and slashed its target price on the stock from 140.0p to 45.0p, stating the group was now "fighting on all fronts". Berenberg said as with many other companies in the e-commerce space, Boohoo's shares have had a "particularly difficult" 2022. While the analysts still believe the group has "invested significantly" in improving its economic, social and governance credentials following reports of failings in its Leicester supply chain back in July 2020, more recent reports regarding working conditions at its Burnley distribution centre will likely make "a sustained revival" in investor sentiment "increasingly difficult".

"Clearly, the most important consideration is the well-being of those affected by the conditions reported in the Times article. Nevertheless, we also believe the investigation represents a setback to any sustained improvement in investor sentiment looking ahead," said Berenberg.

The German bank added that the 2023 trading year was also set to be "a challenging year" from a margin perspective, with the group expecting an adjusted underlying earnings margin of 3-5%, driven by cost inflation and operating de-leverage.

"Considering this alongside our expectations for continued subdued financial performance in the near term, we downgrade our price target to 45.0p and our recommendation to 'hold'," said Berenberg.

Analysts at Canaccord Genuity hiked their target price on electrical goods retailer AO World from 31.0p to 51.0p on Tuesday after they took the time to review the group's interim results.

Canaccord Genuity noted that AO World, which published its first-half results last week, had upgraded its full-year 2023 underlying earnings guidance to the top end of its £20.0m-30.0m guidance range - with its better-than-expected performance driven by higher gross margins and additional cost savings.

However, while Canaccord said cost savings and higher delivery charges should support short-term margins, the consumer outlook still remains "uncertain".

The Canadian bank, which reiterated its 'sell' rating on AO World, also stated that while free cashflow was now improving, conversion remained low and that it believes the stock's current valuation to be too "expensive" relative to other "arguably higher quality" e-commerce operators.

"Our view on AO World has been that the customer economics for the business are highly attractive, with an estimated LTV/CAC over 6x and very quick payback on marketing spend; however, the cost base has remained inefficient. AO World is now looking to remove non-core or unprofitable sales, while also reducing the cost base (down 13% or £17.0m in H1), with annualised FY23 cost savings guidance now increased to at least £30.0m (previously £25.0m)," said Canaccord.

"We believe this is a small step in the right direction but ultimately AO World has an inefficient fulfillment and distribution network, which is limiting profitability."