A few years ago, not many stocks were as hot as boohoo (LSE: BOO). The firm was riding a fast fashion wave due to its peppy brands like PrettyLittleThing. Revenue rose nearly 500% between 2016 and 2020 while net income more than tripled. boohoo went from a near-penny stock to a £5bn market cap.
Yet if I’d invested £5,000 back in 2020, my investment would be a measly £650 today.
How has this happened?
Competitive advantages
In a word — moat. Or more specifically, a lack of one.
A moat – or sustainable competitive advantage(s) — is probably one of the first concepts a new investor will encounter. And for good reason, as any company built to last will need at least one.
Here are three examples of competitive advantages that a firm can develop and leverage to strengthen its market position and sustain long-term success.
- Cost Leadership: being able to produce goods or services at a lower cost than competitors, allowing for competitive pricing and higher profit margins.
- Product Differentiation: offering unique or superior products that set the company apart and create brand loyalty.
- Switching Costs: creating barriers that make it difficult for customers to switch to competitors.
Chinese competition
Unfortunately, it seems boohoo might be lacking in this department. After all, Chinese fast-fashion retailers Shein and Temu have been able to muscle in and grow rapidly.
These firms send the majority of their products direct to customers from low-cost factories in China. This keeps their offerings dirt cheap, making boohoo hesitant to raise prices itself.
Meanwhile, with bargain prices always just one click away, there doesn’t appear to be too much brand loyalty among boohoo’s customers (mainly young adults).
In the six months to 31 August, sales fell 17% year on year to £729m while active customers declined 12% to 17m. Full-year revenue is expected to drop 12%-17% and an annual loss is anticipated.
Louise Déglise-Favre, an industry analyst at GlobalData, said that boohoo’s “struggles are largely due to the meteoric rise of Shein, which…is more agile than boohoo and offers unbeatable low prices”.
Turnaround strategy
Despite all this, boohoo is eyeing a comeback. It has made its ‘Back to Growth’ strategy a central priority.
This focuses on building “a leaner, lighter, faster business model” across all its brands.
One area that I think could prove meaningful is its recent investments in warehouse automation. The firm says there has been a seven times increase in unit pick rate, leading to greater efficiency and savings in the first few months.
This should help cement an area where I think boohoo still has an edge. That is faster delivery and, presumably, better customer service due to closer proximity to UK and US shoppers.
In the medium term, boohoo is targeting a 6%-8% adjusted EBITDA margin. And analysts see the business returning to profitability in FY 2026 (which covers most of 2025).
Time to buy?
Currently, the stock is trading on a lowly price-to-sales multiple of 0.28. Therefore, if boohoo can return to double-digit growth and rebuild profitability, I think the share price could rise substantially.
This might justify risk-tolerant investors who are eyeing a big turnaround considering a small position. However, I’m too wary of competition from Shein, Temu and TikTok Shops to feel confident investing myself.
