Fast fashion’s online star Boohoo (LSE: BOO) reported a stellar set of results earlier today. Its revenues for the six months to August are up 45% and net profit is up 53%. At a time when many other companies are struggling to even stay afloat, there’s no question that BOO stands out. And this isn’t even the full story.
The company has revised its 2021 guidance upwards. It expects revenues for the full year, which ends in February next year, to be higher by 28% to 32%. BOO had earlier forecast revenue growth of 25%. Similarly, it has also slightly improved its earnings forecast. This makes the Boohoo share price, at a low £3.7, attractive. Or does it?
Boohoo share price has a downside risk
I think there are risks to consider when buying the stock. One, discretionary consumer spending is hit during slowdowns. BOO has so far successfully evaded being impacted by this, but future uncertainty can’t be ruled out either. The pandemic is still in force and the UK’s economic future (and indeed, the world’s as well) is a question mark as redundancies pile up and the unemployment rate rises.
The Boohoo share price was also impacted by revelations of poor working conditions in some of its suppliers’ factories earlier in the year. It has since conducted an independent review and committed to making positive changes to counter the situation. However, this isn’t the first time that this issue has been raised. Until such time that investors are convinced that BOO is acting ethically, it may continue to stay stressed. There’s also the risk of government intervention in this case.
Despite this, the company’s earnings ratio is at a high 72 times. I don’t think that’s necessarily out of whack. Investments have chased stocks of companies that continue to perform despite the pandemic. As a result, many high-performing companies are presently trading at high double-digit price-to-earnings (P/E) multiples. At the same time, given Boohoo’s present challenges, I’m considering safer high-growth stocks.
An alternative to consider
JD Sports Fashion is one FTSE 100 stock I like. Its results were sluggish for the half year up to 1 August, but it being a brick-and-mortar retailer, this was to be expected. Its financials could stay underwhelming in the foreseeable future as well. At the same time, I’m optimistic about the stock over the longer term. Its specific niche of sportswear is a growing market and it has been financially robust in the past. It was also FTSE 100’s best performing stock in 2019. In fact, despite the lacklustre results, its share price has continued to rise this month. Further, its earnings ratio is comparatively lower than BOO’s at 41 times.
I think it’s a pity that BOO with its fast growth is still a risky stock because of its present situation. The whole challenge may well blow over and investors will be handsomely rewarded, but I’d much rather wait for the storm to pass than buy at the current price.
