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The Boohoo share price: opportunity or trap?

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The Boohoo (LSE: BOO) share price plunged more than 20% in early deals this morning. This caps a disastrous year for the company’s stock. It’s slumped 40% over the past 12 months.

And recent gains have wiped out all of the company’s pandemic gains, and then some. After the Boohoo share price surged to an all-time high of around 413p in the middle of June 2020, as the group benefited from rising order volumes in the pandemic, the stock is now back below 300p – the level at which it began 2020. 

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Boohoo used to be one of the most sought-after stocks on the London market. So, after these declines, I’m beginning to wonder if the company’s an opportunity that’s too good to pass up. 

What is behind the declines? 

Whenever I come across a stock that’s seen significant declines, I try to establish why it’s performed the way it has before taking a position. 

Shares in the online fast-fashion retailer are trading lower today after it announced that costs would be higher than expected in its current financial year. Management also warned that sales growth could be between 20% and 25% for the year to February 2022, after guiding for growth of 25%

This lower growth forecast is just the latest in a string of disappointments for investors.

Boohoo’s sales jumped in the pandemic, as stuck-at-home consumers flocked to its online offering.  However, as the economy has reopened, the number of options for consumers has increased. At the same time, competitors have got their act together. Boohoo had the online retail advantage in the first half of 2020, but the pandemic has forced other retailers to up their game. 

The company’s also been grappling with reputational issues. It’s been accused of underpaying its employees and providing misleading prices for customers in the US. 

Management’s pledged to get on top of the labour issues and is investing heavily to improve conditions. This seems to be one of the reasons why costs are rising.

The outlook for the Boohoo share price

Considering all of the above, it’s challenging for me to establish whether or not the stock’s an opportunity or a trap, at current levels. 

It’s clear the group’s facing some significant challenges. Nevertheless, revenue growth of 20% is still impressive. This will come on top of last year’s growth when revenues expanded 41%, after an increase of 44% for the company’s 2020 financial year. 

Technically, a company qualifies as a value trap if its ability to make profits has been severely and permanently impaired. Clearly, that’s not the case here. 

Therefore, I’m inclined to say the Boohoo share price isn’t a trap. Instead, it could be an opportunity. As I’ve pointed out before, the stock’s now trading at one of its lowest valuations in recent memory after its recent declines. 

With this being the case, I’d be willing to buy a small speculative position in the stock for my portfolio. 

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Rupert Hargreaves 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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