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Will the Boohoo share price ever return to 400p?

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The Boohoo Group (LSE: BOO) share price peaked at 415p in June 2020. Today the stock is trading at under 190p. A profit warning caused the shares to crash at the end of September. The stock is now 40% lower than it was one year ago.

What happens next for Boohoo? Will shareholders who bought at 400p ever get their money back? I’ve been taking a fresh look at these shares to find out more. I think there could be an opportunity here.

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BOO’s problems don’t look too serious

Most industries are struggling with supply chain problems and labour shortages at the moment. So I wasn’t surprised to see Boohoo comment on both “freight inflation” and “wage inflation in our distribution centres”.

Unfortunately, these rising costs have come at the same time as Boohoo has been investing in new warehouse capacity to service its growing brand portfolio. In addition to well-known brands such as Pretty Little Thing and This, it now includes a number of former high street stalwarts, such as Debenhams, Warehouse, and Dorothy Perkins.

Return rates on orders have also returned to pre-pandemic levels as shoppers buy more fitted clothing and less comfy lockdown garb. In the UK, customers get free returns. That means extra costs for Boohoo.

The overall impact of these problems is expected to cut Boohoo’s adjusted EBITDA profit margin by around 0.5% this year, to between 9% and 9.5%. This is obviously a bit disappointing. But I’m not sure these issues are serious enough to justify the fall we’ve seen in Boohoo’s share price.

Higher costs apply to all retailers at the moment — and Boohoo remains much more profitable and faster growing than larger rival ASOS.

Still growing fast

Boohoo’s sales rose by 45% during the first half of last year, as the original lockdown sent shoppers online. Sales growth has slowed this year as shops have reopened. But Boohoo appears to have held onto last year’s gains. The group’s sales rose by 20%, to £975.9m, during the first half of this year.

Some of these gains may have come from the group’s latest acquisitions. It’s a little hard to say, as the company does not provide this detail. But I’m confident this is still a fast-growing business. Management expects full-year sales growth of 20% to 25% and broker forecasts suggest earnings per share will rise by around 12%.

Boohoo’s investment in new warehouse space means that the company has the capacity to handle sales of £4bn per year. With sales expected to hit £2.1bn this year, the company should now be able to double its sales without needing to invest in new infrastructure.

Boohoo share price: too cheap?

What next for Boohoo shares? The latest broker forecasts price the shares on 20 times current year earnings. This is expected to fall to 16 times earnings next year, as the group’s profits bounce back.

I see this as a fair valuation. I’d be happy to buy Boohoo stock at this level. But I’m not sure the company’s growing size and larger cost base will allow the kind of rapid profit growth we’ve seen in the past.

For this reason, I don’t expect Boohoo’s share price to return to 400p in the next few years.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS and 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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