Key points
- Boohoo shares are trading at five-year lows
- The group’s UK business is growing strongly
- US market provides opportunity for big growth
The Boohoo (LSE: BOO) share price has fallen by almost 70% over the last year. It’s not been a good time for loyal shareholders, but I’ve been wondering if the stock has now fallen too far.
After all, Boohoo has delivered average sales growth of 55% per year since 2016. With US expansion underway, the long-term growth potential could be huge. Should I add Boohoo stock to my portfolio in 2022?
Why I might buy
One attraction for me is that Boohoo has a strong record of growth and very experienced management. Sales have risen from £295m in 2017, to £1,905m for the 12 months to 31 August. Boohoo has consistently been more profitable than rival ASOS too.
Co-founder and chairman Mahmud Kamani has worked in the clothing industry for decades, while chief executive John Lyttle was previously in charge at budget fashion retailer Primark.
Kamani also remains Boohoo’s largest shareholder, with a 12% holding. I estimate this stock would have been worth more than £500m 12 months ago. Today it’s worth around £160m. I’d imagine that Kamani will be keen to rebuild the value of his shareholding, so his interests should be aligned with smaller investors.
Growth in the core UK business has also remained strong. Sales rose by 32% to nearly £900m during the nine months to 30 November. Acquired brands, such as Karen Millen, Debenhams, Warehouse and Dorothy Perkins, are helping to expand the company’s appeal beyond its core youth market.
Two problems that worry me
Unfortunately, this strong UK growth is not being echoed abroad. Sales in the rest of Europe fell 14% to £159m during the first nine months of Boohoo’s current financial year. US growth slowed to 10%.
One problem is that Boohoo still fulfils all of its international orders from its UK warehouses. This means that company has been hit hard by higher air freight costs and extended delivery times for overseas customers. In total, management expect to report £65m of extra freight costs for the 2021/22 financial year. That’s equivalent to around half Boohoo’s operating profit in 2020/21.
I expect these costs to ease over time as supply chain backlogs gradually clear. Meanwhile, US growth could pick up again when Boohoo opens its first warehouse on the continent — although that isn’t expected to be ready until 2023.
Boohoo share price: my decision
I think Boohoo still has big growth potential. However, I think it could cost more than expected to deliver on this promise. I’m not sure we’ll see Boohoo’s growth return to past levels, at least not consistently.
Overall, my feeling is that the Boohoo share price is about right at the moment, reflecting the risks and opportunities the business offer for potential investors. For me, the stock would be a speculative buy — I’d only want to take a small position.
On balance, I’m not excited enough to buy Boohoo shares right now. But I’ll continue to watch the company’s progress with interest and may revisit the stock in the future.
