Barclays downgrades Boohoo to 'underweight'

Barclays downgraded Boohoo on Wednesday as it took a look at online fashion retailers.

The bank cut Boohoo to ‘underweight’ from ‘equalweight’ and slashed the price target to 85p from 135p.

It said that after many years of strong top-line growth, fashion e-commerce retailers are coming out of the pandemic with the challenge of sustaining elevated growth and stabilising margins. On top of that, they face "a laundry list" of headwinds, including global supply chain pressure, macro conditions, competition, ESG, and company-specific issues.

"FY22 earnings forecasts have come down in recent quarters, but calling the earnings inflection is tricky. Investors need to gauge the timing of the inflection and the medium-term trajectory," Barclays said. "Visibility remains low, making it nearly impossible for investors to get comfortable on either."

Barclays said that on the balance of risks, it has "relatively higher confidence" in Zalando meeting both short-term numbers and medium-term targets, and we reiterated its ‘overweight’ rating on the shares.

"We see incremental risks at Boohoo and think things could get worse before they get better," Barclays said.

"We do not think it is fundamentally broken but expect growth to come at a higher cost than medium-term guidance implies."

Barclays said that despite "superficially similar" business models, it prefer Asos to Boohoo on a 12-month horizon given relatively fewer operational headwinds, "albeit with limited confidence". It reiterated its ‘equalweight’ rating on Asos.