Fast-fashion e-tailer boohoo (LSE:BOO) grew very quickly in the years leading up to the pandemic and in the early stages of lockdowns as physical stores had to close. However, throughout 2021 and 2022, the business struggled due to a range of headwinds. With boohoo shares down 38% over the past year, some see it as an undervalued stock to buy.
Yet I’m leaning more towards steering clear. Here’s why.
Lots of issues
The problems that have mounted for boohoo over the recent past are almost too numerous to cover! Last year in particular, the rise in freight costs and transportation delays meant that fulfilling orders in a timely way was difficult. This is still a problem. In the Q1 2023 trading update, it commented that “extended delivery times compared to pre-pandemic levels [are] continuing to affect the proposition.”
At a broader level, rising inflation put pressure on profit margins. Not only does this increase the cost base for the company, but revenue can also take a hit from the consumer side. After all, if I’m conscious that inflation is high and my purchasing power is being eroded, I’m going to spend less on new clothes.
Evidence of this negative impact was seen in the Q1 update. Revenue for the last four months of the year was down 11% versus the same period in 2021.
The final risk worth touching on is heightened competition. Fast fashion has always been a tough sector to operate in. Yet boohoo is pushing ahead with international expansion, such as with the new US distribution centre. The problem here is that it opens itself up to battling different local competitors. Rather than just sticking to the domestic market and doing it well, the strategy abroad isn’t working yet (judging by the latest financials).
Noting the fall in the share price
Investors can flag up the extent of the share price tumble as a reason for buying now. Down 84% over the past two years, it certainly provides a more attractive level at which to consider investing. Yet given the profit after tax for the last reported year was -£4m, I can’t use the price-to-earnings ratio to assess its value. This makes it hard for me to say with any confidence if the stock is genuinely undervalued.
Even without the availability of the ratio, I think it serves to show that just because something has fallen in value, it doesn’t mean it’s always undervalued. There may be many valid reasons why the stock has dropped. And if anything, I feel boohoo shares are fairly valued when I consider it from a fundamental perspective.
The picture hasn’t really changed
Ultimately, I don’t feel what’s happening in 2023 offers a big enough catalyst for boohoo shares to meaningfully rally. Many of the problems from last year (inflation, higher cost base, lower demand) will spill over. Competition will be just as fierce, both at home and abroad. So although I don’t see any risk of the business being in financial trouble, I don’t see enough positive sparks now to consider it as a value buy.
