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The Boohoo share price is falling. Should I buy now?

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The Boohoo (LSE: BOO) share price has had a nightmare few months. The online fashion retailer’s shares spiked in June 2020 as consumers became reliant on online shopping. However, in the past six months, the shares are down 20%. Let’s take a closer look if this stock could be a good buy for my portfolio.

Bearish trajectory

I think there are two main reasons why the Boohoo share price is falling. Firstly, the company has seen a number of allegations about underpayment of workers in its supply chain. In December 2020, the Guardian reported that in a Pakistani factory, workers were paid just 29p an hour to manufacture Boohoo garments. Similar cases have plagued Boohoo throughout 2021.

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In addition to this, the company is fighting a £100m lawsuit over misleading advertising. I think the constant ESG battles Boohoo seems to face is beginning to turn investors sour. Unless it can begin to solve these issues, I think the Boohoo share price has further to fall in the future.

Secondly, the spike in growth for 2020 seems to have slowed throughout 2021. I would expect this to be the case, as pandemic restrictions ease and people spend more time in physical stores rather than shopping online. Boohoo reported a 40% rise in revenues for 2020. However, the growth forecast for 2021 is 25%. I think this is another reason the Boohoo share price has been falling in recent months.

Reasons to be optimistic

That being said, there are a number of reasons why I think the Boohoo share price could rise in the near future. The company’s net cash position looks healthy at just under £200m, which is encouraging, considering its recent acquisitions that have included Karen Miller, Oasis, Debenhams, and Dorothy Perkins. These acquisitions also help Boohoo add vital market share, which will help ward off competition and increase revenues.

Despite this, the group’s margins have stayed strong. Revenues rose from £195m in 2016 to £1.4bn in 2020. Over the same five years, profits rose from £15m to £91m representing margins of just under 10% in both years. This shows me the firm can stay consistently profitable, even while massively scaling up operations. This fact, coupled with the recent acquisitions, gives me confidence for the future of the share price.

Boohoo share price: The verdict

If Boohoo can get some of its ESG problems in check, I think the group has a bright future ahead of it. The current P/E ratio of Boohoo is 29.5, which is over half its five-year average. Therefore, I think the current Boohoo share price offers some good value.

For me, the fact that margins have stayed in check despite the ambitious expansion, is the most encouraging factor. This coupled with a historically lower valuation makes me think Boohoo could be one of the hottest UK retail stocks to add to my portfolio today.

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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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