As a shareholder in fashion retailer boohoo (LSE: BOO), I could be tempted to make a sobbing noise myself! The boohoo share price has crashed 60% in the past year.
That is enough to bring some investors to tears. But I try to keep my emotions out of investing decisions. Instead, I aim for a rational, long-term approach to assessing stock market opportunities.
After its steep fall, are boohoo shares now a potential bargain I should consider buying more of for my portfolio?
Business challenges
The boohoo share price chart looks terrible. But it is actually slightly less alarming than that of rival ASOS, which has seen its shares fall 67% in the past year.
The online retail sector is facing big challenges that many investors feel could undermine its long-term profitability. Inflation has driven up costs. A recession threatens to cut consumer spending on non-essential clothing purchases.
Postal strikes and logistics challenges have added to the difficulties of running a profitable online business. Meanwhile, rivals like Shein threaten to undercut existing retailers on price. That could lead to lower profit margins in the sector, affecting boohoo as well as its competitors.
Trading update
This week we will learn what impact that has had on boohoo lately, when the company updates the stock market on its trading performance for the final (and important) four months of last year.
The Pretty Little Thing owner’s interim results covered the six month period before then. They were closer to being little than pretty. Revenues were 10% lower than in the same period the year before, adjusted profit before tax crashed 90%, and net cash of almost £100m gave way to net debt of £10m.
Trading remains challenging. I am not very optimistic that this week’s update will detail a significant turnaround in fortunes. The company previously indicated that, if trading conditions remained broadly unchanged, it expected “a similar rate of revenue declines to persist over the remainder of the financial year“.
But a 25% jump in the boohoo share price over the past year suggests that other investors may be expecting more positive news than I am.
Is it a value trap?
If the company expects more of the same, why have the shares been moving up strongly in the past few weeks?
It could be that the boohoo share price is a value trap. It may look cheap relative to historical earnings. But if profit margins continue at the same low level as at the interim stage, the current market capitalisation of over half a billion pounds could actually be more than boohoo merits.
However, I remain upbeat about the outlook for the retailer. It has a proven business model that has been highly profitable until recently. The company is focussing on managing its costs. That could help boost margins even if revenues decline. I expect that, as inflation eases and consumer sentiment improves with the economy, profits will be substantial again.
I therefore see boohoo as a potential bargain for my portfolio. But the company does clearly face risks in the next several years. I already own quite a few shares. So I plan to hold them but will not be buying any more for now.
