The Boohoo (LSE: BOO) share price has had a real rough time of it lately. The stock’s plunged nearly 40% this year, and 41% over the past 12 months.
Following these declines, the stock’s now back where it was in the middle of 2019, excluding the stock market crash in April of last year.
Shares in the group have plunged even though Boohoo’s revenues and profits have jumped. The company reported revenues of £856m for 2019 and a net income of £44m. For its 2021 financial year, sales totalled nearly £1.8bn, and net income rose to £91m.
In theory, the Boohoo share price should track the underline fundamental performance of the company in the long term. Therefore, I don’t think it’s unreasonable to say that as the group’s profits have doubled over the past two years, its share price should have achieved a similar result.
Clearly, that hasn’t happened.
Significant challenges
The company’s faced a tidal wave of challenges over the past two years, which seem to have drawn investors’ attention away from the group’s growth story.
The latest challenges are delivery disruptions, rising costs and competition. All of these led the company to warn at the end of September that pre-tax profits had fallen by almost 64% in the six months to 31 August, despite a 20% rise in sales.
This warning caused the Boohoo share price to drop significantly on the day it was released. Unfortunately, it doesn’t look as if these challenges will dissipate anytime soon.
Manufacturing and transportation costs are rising across the economy. This is particularly concerning for a company like Boohoo, which has always been run with razor-thin profit margins. In 2021, the group reported a net profit margin of just 5.2%.
What’s more, competition in the sector may prevent the company from increasing prices to maintain margins as costs rise.
The outlook for the Boohoo share price
Considering the above, what’s the outlook for the company? I think the group will continue to experience rising costs, increased competition and disruption for the foreseeable future.
These challenges aren’t unique to Boohoo. Almost every company has reported some sort of disruption over the past few months, and it’ll take some time for the economy to work through these challenges.
The Boohoo share price has always been a growth investment and investors have been willing to pay a premium to take apart. Now the growth story’s unwinding, it seems as if the market’s opinion of the stock is changing.
Still, despite the headwinds the company’s facing, it remains a formidable enterprise. It has a strong reputation among consumers and a value offering, which many competitors may struggle to replicate.
These advantages will help the company pull itself out of the slow down when the economy returns to normal. With this being the case, and while I think the Boohoo share price will continue to encounter turbulence in the near term, I’d buy the stock as a long-term growth investment.
