With fresh headaches for boohoo group (LSE:BOO) this week, the share price continues to fall. boohoo shares are down 2% so far today, compounding the 7% fall over the past year. Yet with the stock down a staggering 90% over the past three years, is this a value buy or a trap?
Reputational problems
News broke earlier this week that the firm is considering closing down its Leicester factory. This puts around 100 jobs at risk. It still has a UK presence via other locations, but the Leicester location will linger in the minds for many. It was where a scandal erupted last year when an investigation showed poor working conditions with very low pay at that site.
Further problems have since been uncovered, such as the fact that some orders sent via the factory were actually manufactured abroad in places such as Morocco. The company has also blamed human error for putting “Made in the UK” labels on clothes that were actually made abroad.
I could go on, but I think the point has been well made that boohoo is a struggling company with a damaged reputation. This is reflected in the move lower in the share price over both the short and long term.
Trying to turn the tide
Aside from the reputational issues, the firm’s finances haven’t been helping. The half-year 2023 results showed revenue down 17% versus the same period the year before. As for profits, adjusted EBITDA fell to £31m from £35m the year prior.
Part of the problem is that the company operates with such tight margins. The adjusted EBITDA margin was just 4.3%. This means that it doesn’t take much to swing the company from a profit to a loss.
Fortunately, the management team recognise this and are taking actions. Operating costs fell by 16%, with an active push to reduce overheads. The Leicester closure should help to reduce long-run costs.
The company is also investing in warehouse automation and international distribution centres. This should help to make the operations more efficient and streamlined.
Buying, but not now
I’m not going to buy boohoo shares at the moment. The share price might look cheap, but I don’t think the business is out of the woods yet.
I do feel there will come a time (maybe even later this year) when it makes sense to purchase the stock. If there are signs that the turnaround strategy is working, then I’m keen to get onboard.
boohoo has shown over the years that it has the potential to grow quickly and be a profitable firm. I think this can be the same again in the future. But right now, I just don’t have the confidence to invest in what is a struggling firm.
