The boohoo (LSE: BOO) share price is finally moving in the right direction after markets gave a positive response to this morning’s full-year results. There hasn’t been much good news out of the online fashion sector lately, with rival ASOS tanking, so let’s enjoy it.
I don’t hold shares in AIM-listed boohoo myself, thankfully. Its share price has crashed 80.76% over five years, and 53% over the last 12 months. I dodged a bullet there, but now I sense a buying opportunity. Should I go for it?
The boohoo share price jumped 15% in early trading despite an 11% drop in full-year revenue to £1.77bn. Gross margins fell 190 basis points to 50.6%, “reflecting Covid-related cost pressures on raw materials and freight, and stock clearance”. Presumably, investors expected much worse than they got. Let’s call it a sigh-of-relief rally.
No tears today
Management highlighted a number of positives including “significant market share gains over the last three years”, with sales up 43%. It has delivered this through “scale, unlocking cost deflation, and overhead efficiencies”.
boohoo now boasts 18m active customers, up from 13 million in 2020, and claims a target market of 500m. That seems ambitious to me, there’s a lot that could go wrong before it gets anywhere near that and the competition is tough.
Management has to invest heavily, pumping £91m of capital expenditure investment into developing the global infrastructure to support its £4bn sales target. The work includes automation at its Sheffield warehouse, which should generate “significant savings” while the phased launch of its US distribution centre should speed up shipping times.
boohoo faces a host of challenges. Inflation continues to squeeze fashion shoppers along with everyone else, while the cost and bother of handling returns is a problem with no easy solution.
Fast fashion’s image is shaky and the Leicester factory scandal brought boohoo front and centre. That’s a bad look given today’s ESG concerns. A £156m US court settlement over fake discounts at its PrettyLittleThing, NastyGal and boohooMAN brands was another warning shot for investors.
Turning on the style
Yet boohoo still has the scope to be a fashion sector leader, given its stylish social media presence and success in snapping up fallen brands such as Debenhams and Dorothy Perkins.
Today, management said first-half revenues are expected to decline by 10% to 15%, but grow in the second half as investments in price, product and proposition pay off. It also highlighted the “strong” cash generation and balance sheet, with free cash flow of £30.2m and £331m of liquidity headroom.
It’s in a better position than online fashion rival ASOS, whose share price is down 93.58% over five years and 71.4% over one year. I’m sorely tempted, so should I take the plunge?
I’m delighted to see this morning’s recovery. Now management now has to deliver on its growth promises. Trading at 8.43 times earnings, I expected boohoo stock to be cheaper, given the scale of its recent struggles.
If I already owned the stock, I’d breathe a sigh of relief and keep holding. Given boohoo’s many challenges, I think it’s too risky for me to buy today. Buying and selling stocks is a very personal thing, though, and investors with more tolerance to risk might decide this is a chance worth taking.
