In June last year, Boohoo (LSE: BOO) investors would likely have been very confident. The fast-fashion retailer was flying. Then in double quick time, more than £1bn was wiped off Boohoo’s valuation when allegations were made that staff in Leicester factories were being paid less than the minimum wage.
Boohoo has sought to contain the reputational damage since then, taking a number of measures, like cutting suppliers and appointing a judge to lead an investigation into what happened. Yet on some levels, it still doesn’t seem to be a strong ESG investment – fast fashion causes huge pollution and the founder bought his son’s company, PrettyLittleThing. That’s not something you see a lot of listed companies doing. It may or not be a good use of shareholders’ funds.
Yet despite the high-profile missteps of the last year or so, the fall in the Boohoo share price could be a massive opportunity for me to buy shares in this high-growth British company.
Reasons for optimism
The ongoing growth potential of Boohoo is the main reason I’d consider buying the shares in the fashion retailer.
The shares have become much better value and now trade on a forward P/E of 24. Before the bad press, the P/E would have been well over 40, and sometimes more than triple where it is now. Investors had much higher expectations and confidence in the company and management. Yet it is still a very fast-growing company.
Revenue has gone from £195m in 2016 to £1.24bn in 2020. Over the same timeframe, operating profit went from £15m to £91m.
It also shows, from a quantitative angle, a lot of signs of being high quality. For example, return on capital employed has been steady in recent years at around 25%, which is very good. Cash on the balance sheet has grown year-on-year to £276m, potentially giving it more firepower to acquire distressed brands.
Acquisitions are something the retailer has been embracing, for example, though buying the digital assets of Karen Millen, Oasis, Debenhams, Dorothy Perkins and Burton. The latter two were picked up as part of a £25.2m deal when Arcadia collapsed.
Boohoo share price – trap or opportunity?
There is an ongoing legal dispute in the US, which could hold back the share price. Boohoo is accused of using deceptive marketing and could be forced to pay damages of over $100 million. For context, 2020 revenue was £1.2bn.
Investment funds that want to take an increasingly ESG-focused stance on investments may also want to avoid the shares, even if only for publicity reasons.
So there are risks for sure, but that’s the same for any investment. On balance I’m still tempted to add Boohoo shares to my portfolio given the high returns it makes, the rapid revenue growth and the potential for the share price to rise significantly over the coming years.
