boohoo (LSE: BOO) shares have been a bit of a stinker of an investment for those holding. But the online fast-fashion retailer insists underlying growth is still happening in the business.
So, with the share price near 40p, should I buy the stock to hold for a recovery in operations in the years ahead?
The grind lower
It’s a good question. And I asked a similar one on 18 April in my previous article about boohoo. Back then, the headline was, “At 91p, is Boohoo a no-brainer stock to buy?” And the share price had plunged by around 75% over the previous year.
My conclusion in April was to avoid it because earnings had gone ex-growth and the valuation still looked high to me. And since then the stock has crashed by another 56% or so.
However, there was a lonely green shoot of optimism in a dire set of half-year numbers released on 28 September. The company said gross revenue before returns rose by 4% year on year. And the directors said that progress reflects “ongoing improvements in average order frequency and spend per customer, offset by weaker than anticipated consumer demand”.
Yet the rest of the figures were terrible. The actual revenue dropped by 10% compared to the previous year. And adjusted diluted earning per share collapsed by 92%. But to put those figures in perspective, revenue since the equivalent period in 2019 has ballooned 56% higher. But not profitably. Over that same period, boohoo has still seen its earnings plummet by 90%.
There have been extraneous challenges for the business, of course. The usual suspects include inflation-driven increases in costs. And there’s been lower demand because of the challenging economic environment.
Engineering a turnaround
It seems reasonable to expect progress ahead from the management’s efforts to optimise operations and turn the business around. And the general economic and geopolitical challenges could lessen in the future.
Looking ahead, the directors said they expect a “similar rate” of revenue decline in the second half of the trading year to February 2023. And that’s if the general economic challenges continue. But the company is “well positioned” to improve future profitability and financial performance, they said. And that’s because of key projects and anticipated cost efficiencies planned and the anticipated easing of macro-economic headwinds.
So I reckon all the ingredients for a full-blown turnaround of the business are being assembled. And a key part of that is the ongoing growth of underlying revenues.
The collapse in profits makes boohoo hard to value. But I reckon there’s plenty of time for me to form an opinion about the success or otherwise of the company’s turnaround plans. So I’m not fearful of the stock getting away from me in some quick surge higher.
And there’s strength in the balance sheet. So, for now, I’m watching with interest and biding my time before buying any of the shares. After all, the down-trend may not yet be over for the business and the stock.
