The Boohoo (LSE: BOO) share price has suffered a dramatic fall in the past month to the tune of around 30%. To understand why this has happened, we need to explore a number of factors relevant to the e-commerce company over a longer period of time. These include serious allegations relating to labour abuse within factories in the Leicester area. Like many other stocks, however, recent negative price action can be partially explained by the Covid-19 pandemic. Boohoo’s rapid take-off into the public market also means there are many redeeming factors to this stock that I must account for when making an investment decision on this particular stock.
Allegations of labour abuse among producers used by Boohoo first surfaced in summer 2020. As reported at the time, workers were being paid as little as £3 per hour. This news led to a 50% drop in the Boohoo share price and resulted in a systematic review of the supply chain and worker conditions. While these actions aimed to resolve the situation, allegations resurfaced in July 2021. On closer inspection, it is not necessarily clear whether Boohoo had knowledge that these suppliers were engaging in these actions and Boohoo, along with other companies like ASOS, called for greater legislation to deal with such violations in future. Nonetheless, this issue has cast a grey cloud over the Boohoo share price.
The pandemic has also hit Boohoo hard, demonstrated by issues with international deliveries and inflation to freight-related costs. All these issues led to Boohoo issuing a profit warning in December 2021, with projected sales growth falling from around 25% to just 14%. This sales growth seems to have been caused by higher return rates on products and I think this might have been caused by lockdown fears, with customers having fewer events to attend. These figures bear resemblance to a previous trading update in September 2021 that showed a 20% drop in first-half profits. The price action during this period understandably demonstrates negative sentiment surrounding Boohoo. Between these two profit warnings, the Boohoo share price tumbled nearly 64% and this move took place on higher volume. This indicates that sellers are quite comprehensively winning the price battle. It is also worth noting that the price has penetrated the critical support level at 135p, instead falling all the way to 96p.
There are, however, some stories about Boohoo that are much more positive. With many high street retailers going out of business, Boohoo has snapped up brands at cheap prices. These include Dorothy Perkins and some of the Arcadia empire. This leads me to believe that Boohoo is a beneficiary of any high street collapse. It is also expanding into the Middle East through the Debenhams brand. In addition, the UK government’s potential ban on Chinese fast-fashion app Shein could be good news for Boohoo, because this prevents further international competition from diluting the UK market.
Boohoo does have a good business model, but this has been severely disrupted by the pandemic and the labour abuse allegations. I think these problems will ultimately subside, but I would like to see a serious rally in the Boohoo share price before I commit to investing in this AIM 100 stock.
