Is the crumbling boohoo share price a value trap?

The boohoo share price is now deep in penny stock territory. Should our writer consider adding more to his portfolio?

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£3, £2, £1, lower! Over the past year, shares in boohoo (LSE: BOO) have broken through a number of price levels. But the direction of travel has been down. As I write today, the boohoo share price has fallen 18% in early trading and is just 55p. The stock has lost 83% in a year.

As a boohoo shareholder, I am wondering whether I ought to load up at this price – or if the shares may be a bargain trap.

More bad news

The company has consistently disappointed investors over the past 12 months. That continued today with a downbeat trading statement for the most recent quarter. Sales fell in the UK, Europe and the US compared to the same period last year.

One thing I have liked about the boohoo investment case has been that its sales grew even as profits fell. So the latest performance is unsettling. UK net sales returned to growth in May, but it is unclear whether that will be sustained.

The company did not lower its guidance for the year, though it could still do so in the future. For now, it expects percentage revenue growth to be in low single digits. Boohoo guided that adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) margins are expected to come in between 4% and 7%. But that does not help me as an investor understand what the final reported profit (or loss) could end up being.

The ASOS flu

Another reason for today’s sharp fall is a profit warning from competitor ASOS. What I found interesting as a boohoo shareholder was ASOS’s statement that gross sales have been growing but net sales are falling due to “a significant increase in returns rates”.          

That echoes what boohoo said a few months ago about seeing more returns. My theory is that customers continue to shop despite a worsening economy, but are more likely than before to send clothes back rather than keep them. That is bad news for firms like boohoo and ASOS as they incur the costs of dispatching orders and dealing with returns. If that continues, they may need to change their business model when it comes to returns.

My next move

A value trap is a share that looks cheap but keeps getting cheaper — for example, as the true weakness of its business is revealed.

In some ways, boohoo shares are starting to look like a value trap. They have kept falling over the past year, a low price-to-earnings ratio has been wiped out by a big fall in profits last year, and the business faces significant challenges including spiralling costs.

But as the ASOS statement shows, boohoo is not the only online fashion retailer suffering. I expect long-term customer demand to stay strong. Boohoo has strong brands and operational expertise it can draw on.

Maybe there will need to be some changes to the business model in the industry, including boohoo, to reflect the cost impact of growing returns. But I think that challenge is solvable and the underlying business remains strong. I therefore do not see boohoo as a value trap. As a buy-and-hold investor, I would consider topping up my stake.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Christopher Ruane owns shares in boohoo group. The Motley Fool UK has recommended ASOS and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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