As I write mid-morning, the boohoo (LSE: BOO) share price is down 10%. It was trading even lower earlier, but has managed to claw back some gains.
This latest drop compounds what has been a miserable few years for investors in the fast fashion group. The stock is now down 47% in just one year. Over five years, that decline widens to 80%. Ouch!
Yet the company’s full-year results aren’t due to be released until next week. So why are the shares taking a pounding? Let’s explore.
Guilty by association
Last week, the online fashion retailer agreed a court settlement in the US potentially adding up to £156m in value following a class action lawsuit accused it of fake discounts.
Claimants said its brands PrettyLittleThing, NastyGal and boohooMAN ran promotions offering “50% off everything” or similar when the company had never sold them at the original price. Around 9.4m customers in the US are understood to be eligible for compensation.
Obviously this isn’t a great look. But that doesn’t appear to be why boohoo shares are on the slide again (though it surely can’t help). The reason seems to be that peer ASOS (LSE: ASC) reported falling sales and a loss in its interim results today, which sent its shares down 14%.
So it appears boohoo stock is guilty by association.
Gale-force headwinds
It’s worth dwelling on ASOS for a second because the company is in pretty much the same boat as boohoo. Both are facing an immense number of headwinds, almost too numerous to go into.
But the overarching problem is soaring inflation, which has squeezed margins and profits. Not only does inflation increase the cost base for the company, but it affects sales too, as the purchasing power of consumers is eroded.
To ease this, ASOS’s new management team enacted a massive cost-cutting exercise. This included significantly reducing its discounting and promotions. So, higher average prices on clothes than previous years, basically.
However, Asos today posted an adjusted pre-tax loss of £87.4m, excluding exceptional items, compared to a profit of £14.8m last year. Total sales fell 8%.
In some investors’ eyes, this doesn’t bode well for boohoo’s forthcoming set of results.
Will I invest?
The implication seems to be that if ASOS can’t raise prices without negatively impacting sales, then boohoo probably can’t neither. Both companies very broadly serve the same type of customer.
In its latest trading update, boohoo reported revenue for the last four months of the year was down 11% versus the same period a year earlier. Sales are expected to similarly decline for FY23, with a forecast EBITDA margin of 3.5%.
Now, boohoo has well-known brands and some very talented executives running the company. And online fashion is certainly set for strong global growth in future. But the fear is that it might not have any pricing power to materially improve its profit margins.
To make matters worse, it faces immense competition from Chinese fast fashion brand Shein. With $100bn in sales last year, this rival has become a mega-sized fashion e-tailer in double-quick time. And it is incredibly popular in the UK, boohoo’s own backyard.
At 39p a share today, I can see ‘bargain’ hunters being interested. But the stock is too risky for me.
