It has been an impressive few weeks for the share performance of boohoo (LSE: BOO). The retailer’s shares have climbed a third in 2023. They are moving close to 50p each as I write this on Tuesday.
Compared to where they were a few weeks ago, that is good. But they remain 45% below their price this time last year – and 74% lower over a five-year period. If they recover even the past year’s losses, boohoo shares could be a bargain even after the recent rise.
So, should I buy more, to add to the ones I already own?
No nasty surprises
I would hardly say that the company has provided much good news for investors so far this year. In a trading update last month, boohoo revealed that revenues in the final four months of last year fell by 11% compared to the same period in the prior year. There were no bright spots: sales fell in every region. The company forecast a year-on-year revenue decline of 12% for the full 12 months.
But while that may not sound great, the bad news was already pretty much well expected. I think investors had long priced in disappointing sales performance this year.
The company also planted some seeds of hope, referring to “recent positive signs in global supply chains”. They include less disruption and cheaper shipping costs, both of which I think could contribute positively to boohoo’s profitability.
Improving investor confidence
So I think the recent rally in boohoo shares reflects as much as anything a sense of relief among investors that the business performance has not got even worse than they expected.
However, an absence of bad news is different to good news. I think it has helped push the shares up sharply. But I would be surprised if that alone was enough to keep propelling them towards the pound mark.
For that to happen, I think the company needs to show concrete progress. Improving profit margins could be part of that and those improved supply chains may help in that regard. But a lot of investors will also be looking for boohoo to stop sales from shrinking and, indeed, to return to growth.
My take on boohoo shares
If that happens, I think the price could edge up to a pound again. They traded for over £4 apiece less than three years ago, so a pound per share is still far from past glories.
But clearly there is work to be done. Competition in fast fashion is intense, threatening profit margins. An inventory reduction could be good for cash flow, but may lead to less satisfied customers if it means orders take longer to be fulfilled.
As well as managing its bottom line through tight cost control, boohoo should ideally return to topline growth in an environment where many shoppers are extremely cost-conscious. That is possible: people need to wear clothes and the company offers some very low-cost product lines. But boohoo’s recent sales trends are not encouraging.
I continue to hold my boohoo shares. However, I will not add any more in the absence of more promising concrete signs that sales at the company are growing again.
