A lot of clothes shoppers head to boohoo (LSE: BOO) for something cheap and cheerful. But while boohoo shares have been cheap, for most of the past year owning them has not made me cheerful.
They have fallen 35% in 12 months – and 60% over the past five years.
But lately, boohoo shares have been performing strongly.
So far this year they have surged by 57%. The shares have positive momentum. With the company due to announce results in May, I think the shares may move up further before then in anticipation of the company revealing that the worst of its problems are behind it.
Could the shares reach £1 apiece – and what might that mean for my holding?
Business outlook
I think boohoo shares could yet reach £1 again. But before that happens I think the firm will need to show firm evidence of a business turnaround, such as a positive sales growth trend and sizeable profits. Last year, the company crashed to a £4m loss after reporting a £93m profit the prior year.
So far in its current financial year, signs of improvement are limited. In the four months to 31 December, revenue fell in all regions. Total company revenue fell 11% year on year. The company has forecast revenue declines of 12% for the whole year.
It forecasts a margin for the year of 3.5%. That would equate to roughly £60m. But that is not a profit, but rather adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA). Last year’s adjusted EBITDA was slightly more than double that amount but boohoo still made a post-tax loss. On that basis, I think it could be loss-making again in its current financial year.
In other words, on its current trajectory, I do not expect boohoo to show the sort of business turnaround investors will be looking for to mark the shares back up to £1 or higher.
Strong momentum
But if that is the case, why have boohoo shares increased by over half in just three months?
After all, since then, the only big news has been January’s trading update (which contained no surprises) and a couple of developments I see as negative: moving the registered office offshore and setting up a very generous incentive plan. That will reward managers handsomely simply for getting boohoo shares back to the price they were before (in my view) poor management decisions contributed to a price collapse.
Partly I think investors are warming to the rag trade once more. Cost inflation seems to have peaked, although it remains a risk, logistical logjams have eased, and consumers are still spending despite a tough economy. That bodes well for future demand and boohoo is well-positioned to benefit from that.
I also think there has been a basic revaluation of boohoo shares. Even after they surged, the market capitalisation is £750m. For a company that made almost £100m in profit just a couple of years ago, that looks cheap.
So I plan to hold my shares as I think that they could pass the £1 mark again and indeed go higher, as long as the business demonstrates that it is on the right track again. That might not happen soon, but I am hopeful it will occur at some point in the next several years.
