Boohoo’s bid for the brand rights and customer database of on-the-rocks US retailer Nasty Gal came as a surprise.

If successful, it would be the second recent acquisition by the retailer following that of a majority stake in Pretty Little Thing (PLT), which completed today.

The acquisition of PLT, founded and run by Adam and Umar Kamani, the sons of Boohoo co-founder Mahmud Kamani, had been on the cards for a while.

It was built into both etailers’ strategic plans.

But the Nasty Gal bid appears to be more opportunistic.

The news, in November, that Nasty Gal would file for Chapter 11 bankruptcy protection was not a surprise.

Nasty Gal had been on ‘the watch list’ for some time – it was dogged by debts to suppliers, it failed to recoup the heavy investment it made in infrastructure and it had poor sourcing methods.

A decade in the making

Nasty Gal

Nasty Gal

Founded in 2006 – the same year as Boohoo – by the now-celebrated Sophia Amoruso, Nasty Gal began life as an Ebay store on which the hard-up Amoruso, then a struggling photographer, sold vintage finds.

But Amoruso, who was named by Forbes as one of the richest self-made women in America last year, began to distance herself from the company in 2014.

She started instead to focus on her #GirlBoss empire – born of her eponymous best-selling business book.

A Netflix comedy show and a conference series are slated for 2017.

Not long afterwards, the cracks at Nasty Gal began to show.

Even under new chief executive Sheree Waterson, a Lululemon veteran instated by Amoruso in 2014, Nasty Gal’s extensive investment in infrastructure turned out to be overambitious.

And its reliance on third-party brands meant that margins were tight – an ill-fated attempt to extend its own-range clothing was undermined by how it sourced.

“For many years, Nasty Gal had no trouble getting a customer to convert once, but the perceived low quality and value of the product made it hard to get her to return”

Industry title Business of Fashion reported that the retailer’s limited choice of factories resulted in products that did not look as good in real life as they did on screen.

“For many years, Nasty Gal had no trouble getting a customer to convert once,” it claimed. “But the perceived low quality and value of the product made it hard to get her to return”.

This dynamic resulted in a net loss of $21m (on total sales of $77m) for the year ending February 1 and a Chapter 11 application.

Boohoo’s proposed acquisition would only involve Nasty Gal’s IP and customer lists, leaving behind stock, a couple of underperforming bricks-and-mortar stores and a lot of expensive infrastructure.

Breaking America

At first glance, it’s easy to assume that Boohoo believes Nasty Gal to be its ticket into the US market.

But a look at Boohoo’s US sales figures proves it’s much more subtle than that.

“As a business, Nasty Gal has struggled. But as a brand it has resonated very well”

John Stevenson, Peel Hunt

In 2015/16, Boohoo’s non-European sales rose 55.6% to £42.7m, and Boohoo said its key markets of Australia and the US performed particularly well.

“Boohoo’s current US sales are not dissimilar to Nasty Gal’s,” says Peel Hunt’s John Stevenson. “They may even be bigger.

“People initially thought it might just be after its customer file and, sure, there’s an opportunity there, but they are very much after the brand.

“As a business, Nasty Gal has struggled. But as a brand it has resonated very well.”

Stevenson believes that Boohoo will want to “hang” Nasty Gal on its existing American infrastructure, adding the brand to its stable in a bid for cross-pollination.

But Retail Week Prospect analyst Rebecca Marks believes that this move is not strictly necessary.

“One of Boohoo’s key strengths in its domestic market is its social media presence and digital campaigns to drive interest amongst its core millennial market,” she says.

“This is a strategy that can be made scalable on a global level, growing its international customer base without the need to acquire overseas brands.”

“If Boohoo can gain control of a good brand with its own personality, they can almost certainly deliver that brand’s product with a better gross margin”

John Stevenson, Peel Hunt

Stevenson agrees that Boohoo “doesn’t need to do it”.

However, he argues that while there are potentially problematic issues attached to the acquisition – such as the possible dilution of management time and investment priorities – Boohoo’s famed sourcing strength outweighs the potential negatives.

“Boohoo’s strength always comes back to sourcing,” he says. “Its sourcing is fantastic.

“If they can gain control of a good brand with its own personality, they can almost certainly deliver that brand’s product with a better gross margin.”

Improved margins, and a stripping away of costly infrastructure, would be the answer to Nasty Gal’s prayers.

For Boohoo itself, it’s easy to see how attractive the US market can be.

Rival Asos currently makes13% of its sales in the territory – and Deutsche Bank analysts predict this will rise to 20% by 2020.

The territory also generates the highest contribution margin of any globally.

Boohoo’s bid may not be transformational, but it will allow the business a greater share of a key market – and in the ruthless world of millennial etailing, a competitive advantage is everything.