It’s been a pretty miserable 12 months for Boohoo (LSE: BOO) shareholders. The Boohoo share price has fallen by almost 75% since February 2021 and is now trading under 100p. That’s a level I didn’t expect to see again.
I’m not one of Boohoo’s target customers, but I do like a bargain. Broker forecasts suggest the group’s profits will bounce back as supply chain issues ease. If that happens, I think Boohoo shares could be cheap when measured against future earnings. Should I buy BOO for my portfolio?
Why has Boohoo’s share price crashed?
City analysts covering Boohoo shares still seem optimistic. I can see that view too. But if I’m honest, I can also see plenty of things to worry about.
Its latest trading update revealed a sharp slowdown in sales growth and a fall in profit margins. Much of this is due to problems with international sales. At the moment, all of Boohoo’s overseas sales are sent out by air freight from its UK warehouses.
This has caused problems over the last year. Costs have risen and a shortage of freight capacity has caused delivery times to rise. Fast fashion has become slower. As a result, sales to countries outside the UK fell by almost 15% during the three months to 30 November, compared to the same period one year earlier.
Trends can change fast in fashion, especially at the youth end of the market. My worry is that by the time Boohoo has sorted out its supply chain problems, its customers may have moved on to newer brands.
There’s still a big opportunity
Boohoo chief executive John Lyttle is keen to remind investors that the firm gained market share during the pandemic. He believes the current problems are temporary and should soon start to ease.
Mr Lyttle points to the UK market, where sales growth stayed strong at 32% during the most recent quarter. He’s also keen to remind investors that Boohoo is building a warehouse in the US, to support long-term growth.
City analysts seem to accept this story. Their forecasts show Boohoo’s earnings per share rising by 14% in 2022/23 and by a massive 46% in 2023/24 — when the US warehouse is expected to be operational.
If these estimates are correct, then Boohoo shares are priced at just 16 times 2022/23 forecast earnings, falling to 10 times earnings in 2023/24.
In my view, that would be much too cheap for a business delivering that kind of growth.
Boohoo share price: too cheap to ignore?
Although I agree that Boohoo should be able to sort out its logistics problems, I’m concerned about the company’s loss of momentum. In my view, this could be hard to get back.
I’m also unsure about the true quality of Boohoo brands such as Nasty Gal and PrettyLittleThing. Do they have what it takes to deliver lasting success, or will they just peak and fade away?
I’ve decided not to buy Boohoo shares for now. Although I think the stock might be cheap, I think there’s an equal risk that the group’s problems could rumble on for some time. In a worst-case scenario, I think Boohoo shares could still have further to fall.
