Pandemic-related factors affecting freight costs and labour market conditions weighed on boohoo (LSE:BOO) shares over the past 12 months, leading to a 46% plunge. However, the company’s share price has staged a turnaround so far in 2023.
At the beginning of the year, the fashion stock was changing hands under 37p. As I write, it’s above 48p — that’s an impressive 31.5% gain this year to date.
So, can the rally continue, or will the share price remain anchored below 50p? Here’s my take.
Back in fashion?
One catalyst for the bounce in the boohoo share price was a recent upgrade by analysts at Bank of America.
Boosting its target to 75p per share, the bank now attaches a ‘buy’ rating to the company after heaping praise on its cost-saving measures. The analysts also highlighted signs that several headwinds are diminishing, including supply chain disruption as well as elevated energy and raw materials costs.
A recent trading statement revealed boohoo’s tight inventory control — evidenced by a 27% reduction — has helped cash generation. The company had more than £300m in gross cash at the end of 2022, which bodes well for efforts to repair the balance sheet.
What’s more, boohoo expects net debt will fall to £50.4m by the end of February, equating to less than 1x adjusted EBITDA. This puts the business in a better debt position than FTSE 250-listed rival ASOS, which has instructed a debt restructuring firm to work with its creditors.
The encouraging numbers were enough to make Bank of America turn bullish on the retailer. However, I’m a little more hesitant. There are significant indications of weakness in the results, too.
A potential value trap
For the four months to 31 December, boohoo’s UK revenues fell 11% year on year and international revenues also declined 10%. This timeframe captures the crucial festive period. Tumbling revenues across all regions doesn’t suggest there’s much to cheer about in my view.
While Bank of America highlighted an improving macro environment, I think other factors could continue to affect the retailer’s performance.
More Royal Mail strikes are anticipated due to ongoing disputes involving postal workers and their employer, International Distributions Services. Worries about delivery delays could dissuade consumers from making purchases at online retailers like boohoo.
In addition, the company’s pricing power is coming under increasing pressure. The rise of Chinese brand SHEIN has transformed the fast-fashion industry’s competitive landscape. The overseas firm’s innovative points system and use of big data tools are major threats to boohoo’s business.
I’m also sceptical that cost-cutting measures alone can revive the group’s fortunes. There are only so many efficiency savings that can be made before they begin to impact the quality of service the company offers.
Should I buy boohoo shares?
boohoo shares may surge above 50p and stay there, particularly if debt reduction plans instil investor confidence. However, there are some serious risks facing the company that cloud the outlook.
I view the fast-fashion retailer as a high risk/reward play. At present, I think there are better investment opportunities elsewhere in the stock market and I won’t be buying its shares today.
I will, however, closely monitor the company’s performance and it remains on my watchlist.
