Boohoo (LSE: BOO) shares have been taking a beating recently. Yesterday, they fell over 7% alone and over the past 30 days, the shares are down 30%. This bearish trajectory has reversed some of the stock’s previous growth momentum. For example, between April and June 2020, the stock climbed over 112%. However, past returns should never be used as an indication of future performance. So, at the current price of 65p, should I be adding Boohoo shares to my portfolio? Let’s take a look.
ESG concerns
The firm’s business model rests upon the speedy design, production, and advertising of its products – fast fashion. This allows high volumes of garments to be created for low costs to the consumer. While this may sound promising on paper, Boohoo has been embroiled in numerous worker scandals as a consequence.
For example, in September 2020, a report by the Guardian indicated that workers at third-party suppliers were earning well below minimum wage in addition to enduring poor working conditions. The firm was also subject to a class-action lawsuit after being accused of misleading advertising in the US. In my opinion, these are some of the key reasons why investors have turned sour on Boohoo shares.
Another headwind Boohoo is going to have to contend with in the coming months is the threat of rising inflation. As prices rise across the world, it could pose a serious risk to Boohoo’s low-cost, high-volume operations. And supply chain issues have already impacted the firm, leading to 10-day delivery times to the US, which is a vital sales region for Boohoo.
In addition to this, the 2021 Q3 results, released in December 2021, have highlighted that the firm’s pre-tax margin outlook has been lowered from 9% to 6%. Factoring in tax, these margins will shrink further. Falling margins lead to reduced profitability which is the last thing Boohoo needs.
Reasons to be cheerful about Boohoo shares
Yet one reason that Boohoo shares do appeal to me, is the fact that the firm owns a pretty impressive arsenal of brands. It acquired a number of these retailers out of administration in 2021, the largest of which was Debenhams. In addition to this, its US distribution centre is expected to open in 2023, significantly expanding operations in the region. The US contributed to a quarter of revenues in 2021, so this seems like a great move to me.
Couple this expected future growth with the current price-to-earnings ratio of just 9.3, and Boohoo shares do look attractive to me. Perhaps the current share price could offer me a discounted entry position for future growth.
What I’m doing now
Yes, Boohoo shares are cheap, and the firm has some exciting plans ahead. However, I think that short-term rising costs could place a huge strain on the firm this year, especially considering its low margins. In addition to this, the ESG concerns are a big moral red flag for me. Therefore, I won’t be adding Boohoo shares to my portfolio any time soon.
