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.
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.