Investors in Boohoo (LSE:BOO) watched in horror yesterday as shares plummeted by just under 23%. This year hasn’t exactly been kind to this stock. And when combined with today’s continued downward trajectory, the 12-month return is a disappointing -67%.
But why are investors rushing for the exit? And has this panic actually created a fantastic buying opportunity for my portfolio? Let’s explore.
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What just happened to Boohoo’s share price?
Yesterday’s tumble followed the firm’s latest earnings report. But despite what the large drop would indicate, earnings weren’t as bad as it may seem, in my opinion. Over the last nine months, sales at the online fashion retailer grew by double-digits, reaching £1.48bn. That’s 16% higher than 2020 and 65% more than was achieved in 2019.
In the meantime, Boohoo remains liquid with £70m of excess cash at its disposal. And at the same time, the construction of its new logistics network is proceeding on schedule. The first distribution centre is on track to become operational in 2023. And once the whole network is complete, management expects the company to have the capacity of achieving over £5bn in annual sales.
Needless to say, this is all quite encouraging, especially since performance does not appear to be dampened by the reopening of bricks-and-mortar fashion stores. So, the question is, why did Boohoo’s shares take a nosedive this week?
Looming problems ahead
As impressive as the total sales may have been, it wasn’t enough to offset management’s cut in guidance. Due to an increase in customer returns and ongoing disruptions courtesy of Covid-19 and the Omicron variant, Christmas sales performance may not be as explosive as initially anticipated. As such, the management team has adjusted its full-year guidance to investors’ dismay.
Total sales growth for its 2022 fiscal year ending in February is now expected to come in between 12% and 14% instead of the previous guidance of 20%-25%. Meanwhile, pandemic pressures on freight and transport costs are also expected to squeeze the already tight profit margins. Therefore adjusted EBITDA margin guidance was also cut to 6%-7% instead of the initial 9%-9.5% forecast.
Seeing a growth slowdown in a growth stock is not exactly a recipe for upward momentum. And with Boohoo shares trading at a premium for quite some time, I’m not surprised to see such volatility.
Is this actually a buying opportunity?
As frustrating as this cut to guidance is, the cause appears to be tied to Covid-19. And as devastating as the pandemic continues to be, it’s ultimately a short-term problem. Today, Boohoo shares trade at a price-to-earnings ratio of around 23. That’s certainly not cheap. But it’s far more reasonable than at the start of the year.
Combining this with a soon-to-be-launched distribution centre does make me believe a buying opportunity has emerged. Therefore, I am considering adding this stock to my portfolio today.
