The price of boohoo (LSE: BOO) shares fell to an 8-year low yesterday (03 October). This followed the fast fashion company’s grim interim report. And this heaped more misery on long-suffering shareholders.
In June 2020, the stock reached an all-time of 413p. Today, I can buy that same share for just 28p. That’s a 93% drop!
Given the competition boohoo faces, is there any way back for its shares? Let’s dig in.
Little to cheer
In the six months to the end of August, the company reported that revenue fell 17% year on year to £729m. Sales declined across all brands, with UK revenue plunging 19%. That’s worrying given that this is the group’s core market.
Overall, the company posted an adjusted pre-tax loss of £9.1m. And it now expects annual sales to fall by 12% to 17%. That’s much more than previously anticipated, though guidance for full-year adjusted EBITDA of £58m-£70m remains.
Looking forward, supply chain deflation should continue and the group has identified £125m of cost savings over the next couple of years. As a result, chief executive John Lyttle remains bullish: “Our confidence in the medium-term prospects for the Group remains unchanged“.
On the contrary, I think the medium-term outlook appears very uncertain. And competition is a big reason why.
Formidable competition
In 2019, boohoo’s management brushed off the competitive threat from Shein. Not any more.
In its most recent funding round, the Chinese fast fashion juggernaut was valued at about $66bn. That’s around 150 times more than boohoo’s current market value. And Shein could go public next year, likely raising a tonne of extra cash.
The clothes that it sells are made in China. This results in unbeatable low prices, which continues to drive budget-conscious Gen Z consumers to its platform.
Elsewhere, TikTok Shop is growing like a weed, as is rival Chinese shopping app Temu.
Can small-cap boohoo fight off these leviathans? Perhaps, but I remain doubtful. It has lost market share while keeping prices low. That isn’t a great recipe.
No moat to defend the castle
Stepping back, I think this demonstrates how important Warren Buffett’s concept of a moat (or lack of one) really is.
Historically, a moat helped protect medieval castles from enemy invasion. In business terms, it is a competitive advantage that prevents a firm’s economic castle from being raided by rivals.
Crucially, this allows it to maintain pricing power and above-average profit margins. Think Visa, Mastercard, Apple, ASML, and so on.
Unfortunately, as far as I can see, boohoo doesn’t have any sort of moat. It has almost no pricing power, particularly as its products are at the very lower end of the fashion market. And its profit margins have collapsed as inflation and increasing competition have wreaked havoc.
Looking elsewhere
I note that Frasers Group continues to scoop up boohoo shares and has now built up a 10% stake. So it’s possible a takeover bid might materialise, which could potentially send the share price higher, depending on the details.
But I have no interest in investing on that basis. And I think boohoo shares could fall further as investors fear a race to the bottom across the fast fashion industry.
For my money, there are far safer stocks out there to invest in.
