Boohoo (LSE: BOO) shares fell around 10% in the past year. The online fashion company has underperformed the broader FTSE AIM 100 index, which rose about 35% in the same period. Also, it is one of the few companies that I have reviewed recently to have a negative return.
Is the price drop a chance for me to buy the shares?
Boohoo company’s fundamentals
The company’s revenue growth has been outstanding. It grew at a CAGR (compound annual growth rate) of 44% in the past four years. In the fiscal year 2021, revenue grew by 41% year-on-year to £1.7bn. It was primarily due to strong growth in all regions and brands, which is positive. International revenue accounted for 46% (45% for 2020) of total revenue. In my opinion, better geographical diversification reduces the risk of lower demand in a particular market in the future.
There is another reason why I like Boohoo shares; it is profitable. Most of the modern companies I reviewed recently have reported losses, some of them due to the Covid-19 pandemic. Boohoo’s profits have grown 28% year-on-year to £93.4m, a net profit margin of 5.35%. The company has been profitable in the past five years, which shows it is consistent. Also, its net profit has grown at a CAGR of 39% during this period.
The number of active customers increased by 28% to 17.8m. The acquisitions in the past year also helped to increase the company’s demographic reach and product offering. The company has a stable balance sheet and net cash of £276m. It was also helped by a strong operating cash flow of £201.1m.
Boohoo shares are currently trading at a price-to-earnings ratio of 44.50, compared to the five-year average of 70. The price-to-sales ratio is 2.32 compared to the historical average of 4.24. So, the shares are currently trading at a discount to their historical average.
Risks to consider in investing in Boohoo shares
Boohoo has been accused of unethical practices in its supply chain. It has been reported in the past that some of the workers in its supply chain have been paid very poorly. In response, the company has excluded some of the suppliers. It has also linked executive pay to specific environmental, social, and corporate governance (ESG) targets. However, if the company fails to tackle this issue, it could be negative for the share price.
The fashion retail sector is highly competitive. In my opinion, if the company fails to meet the rapid historical revenue growth, it could negatively impact Boohoo shares.
The company has benefitted from online shopping during the Covid-19 pandemic. However, now high street retailer shops have reopened. This could put some pressure on the company’s financial results. This is also evident in the company’s revenue guidance as the management expects this year’s revenue to grow by 25%. The growth rate is strong, however, it is below the historical average.
Conclusion
The company has good brands. Its revenue and profit growth rate are extraordinary. In my opinion, the benefits outweigh the risks. I would consider buying Boohoo shares in the coming months.
