Shareholders of boohoo (LSE: BOO) have certainly suffered over the past couple of years. Since reaching a peak of 413p in June 2020, the stock has fallen 89% and now trades for pennies at 46p. What’s going on here? And should I buy boohoo shares at today’s price?
Downgrades
Last week, an analyst at Liberum downgraded boohoo stock to sell and slapped a 35p price target on the shares. He thinks it’s going to be a “hard slog from here” for boohoo due to cost headwinds and intense competition from Shein, its Chinese rival.
Other analysts also came out with bearish ratings on the stock. Now, I wouldn’t necessarily buy or sell a stock on the opinions of analysts. And I would certainly take the price targets they set with a large pinch of salt.
But in this case, I think the pessimism is warranted.
Slowing growth
boohoo is a leader in the online fast-fashion space, with its products aimed at 16-30 year olds. The company has grown for many years, until recently.
In the half year to 31 August, it reported a 10% fall in total revenues to £882m. The firm now expects full-year sales to be down about the same amount. It says this drop is due to the cost-of-living crisis that’s reducing consumer demand.
The problem boohoo faces is that it can’t raise prices too much, particularly as its young consumer base is price-sensitive. So the company has very little pricing power to mitigate its own rising costs in transport, energy and employee wages. As such, for the first six months of this year, its adjusted profits were down 58% year on year to £35m.
To make things worse, the Bank of England is predicting an inevitable UK recession that could be the longest in 100 years. That’s a bleak prospect for all retailers, not just boohoo.
Competition
This year Chinese fashion giant Shein became the most downloaded app in the US, surpassing, Instagram, Amazon, Twitter and even TikTok.
Fast fashion is an industry built on cheap prices and ever-changing products. The problem for boohoo is that Shein now beats it on both fronts. Its platform has more choice and the products cost less.
Shein connects Gen-Z customers in the West with its vast network of garment factories in China. It controls the whole supply chain, from design and manufacturing to shipping.
The Chinese fashion juggernaut is now valued at between $65bn and $85bn in private markets. That’s around 100 times larger than boohoo’s current market value of £587m. This shows the level of competition the UK company is up against.
It now appears that Shein, not boohoo, is the future of fast fashion.
A perfect storm
That being said, there’s nothing wrong with the company’s digital-first business model. After all, the global e-commerce market is expected to grow from $3.3trn today to $5.4trn in 2026, according to Morgan Stanley. So maybe the rise in the overall e-commerce tide could still lift all boats, including boohoo.
However, I think it’s facing an almost perfect storm. It’s dealing with high inflation, slowing consumer demand, a likely recession, intense competition, and little pricing power to mitigate any of this. As such, I won’t be buying the stock.
