Down 81%, are boohoo shares set for an explosive comeback?

boohoo shares have been falling rapidly. But could interest from a billion-dollar hedge fund cause a turnaround in 2022?

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The boohoo (LSE:BOO) share price has had a torrid year in the market. But the latest news of US hedge fund giant Citadel acquiring a 5% stake in the company could be the lifeline the online fashion retailer needs. 

Over the last 12 months of trading, boohoo shares are down 81%. They are currently trading at 57p, down 86% from the all-time high price of 413p set in June 2020. But is the latest investor interest in the firm a sign of a turnaround or is the company a value trap at current levels? Let’s find out. 

Overseas interests 

Any time a large investment firm acquires a stake in a falling stock, I tend to look at it as a long-term play. And Citadel’s interest does not come as a surprise to me. boohoo has been increasing its presence in the US, which is its second-fastest growing market after the UK.  

In fact, sales in the region grew 4% in 2022. However, the biggest roadblock that boohoo’s expansion in North America faces is its lack of distribution centres there. And with rising fuel prices, shipping costs have multiplied for e-commerce businesses. In the last year alone, boohoo saw a £26m increase in shipping costs. And this has led to inflated prices in the region.

The board already has plans underway to establish a physical distribution centre in the US. And I think Citadel sees this move as a fix that could open up a huge market for the company in the country. A distribution warehouse in the US would reduce shipping costs which in turn could reduce product prices.

While I think this is a promising move for the company, is it enough to trigger an explosion in the boohoo share price? I think not.

boohoo share price outlook

Looking at the performance of boohoo shares over the last year, I think investors see glaring holes in the business. While sales increased last year, the company’s revenue has dropped steadily over the last four quarters. While a lot of this can be attributed to inflationary pressures, the company’s valuation has been dropping too. 

At their highest point, boohoo shares were valued at £5.2bn. At the current share price, they are valued at just £721m. And the company also recorded its first fall in sales volume in the UK last month. 

The group’s adjusted earnings before interest, taxes, and amortisation (EBITA) fell 28% last year to £125.1m. And the revenue margins dropped to 6.3% in 2022 from 10% in 2021. Despite this, boohoo is on an acquisition spree. The firm spent £261.5m on brands like Debenhams and building infrastructure for growth. This brought down net cash to £1.3m from £270m in 2021.

This looks to me like shaky financial grounds for a business wanting to expand fast. And the group expects lower sales for 2022-23 as well, citing pandemic-related concerns as the driving factor. 

The group is already looking to cut down on inventory size and implement cost-effective sourcing to reduce losses from the high volume of product returns that most fashion brands are facing today. But with inflation running rampant, I think September’s interim results will be subdued as well.

Yes, the long-term growth prospects for the brand are still attractive. But because of the economic turbulence right now, I do not see boohoo shares exploding after the Citadel purchase, which is why I am steering clear of the online fashion brand at the moment.

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 assessed. Consider taking independent financial advice.

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended 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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