The boohoo (LSE: BOO) share price has crashed from just above 400p in 2020 to around 33.45p as I write (1 May).
But now there’s the possibility of a turnaround in the business. If that happens, we could see the share price explode higher from its current depressed position.
From hero to zero
What happened to the online fashion clothing retailer? In a word – earnings!
To be specific, the lack of them.
boohoo has gone from posting earnings per share of 7.24p in the trading year to February 2021, to zero.
In fact, it’s worse than that. Analysts expect the company to post a loss per share of over 6p for the 12 months that ended in February this year. Investors can sift through the carnage with the full-year results report due on 8 May.
Performance has been terrible and the company has faced many challenges.
Looking for signs of improvement
However, with the earnings report coming later this month, it’s a good time to focus on the stock. Sometimes in such situations, it’s possible to find a few nuggets among the rubbish that can tip off investors about better trading ahead. But that’s not always the case when businesses get into trouble.
Last October with the half-year results report, chief executive John Lyttle sounded a note of optimism. The company had made “substantial” progress with key projects and initiatives. One of those was the launch of a US distribution centre.
There had been “significant” improvements in lead times for sourcing goods. Meanwhile, the firm had cut some of its selling prices to “reinforce” its value credentials.
However, the interim figures were dire. Revenue and earnings declined year on year, and net debt rose.
But he said the company had identified more than £125m of ongoing annualised cost savings. The directors had “confidence” in the medium-term prospects for the Boohoo business and saw a “clear path” to improved profitability and a return to growth.
At the last count, there was around £162m of net debt on the balance sheet. That’s not the strongest position for a loss-making business to be in – I’d prefer to see net cash.
A big shareholder has arrived
Nevertheless, Frasers Group has built a position in the bombed-out stock and now holds around 22% of the shares. The organisation has a history of buying struggling retailers, starting when it was called Sport Direct under the management of Mike Ashley.
However, not all the acquisitions under Ashley’s watch have been successful turnarounds. So Frasers’ presence on the boohoo share register has limited value as a positive indicator.
I think boohoo still looks risky now, but with the potential to be a decent turnaround play. It could even rebuild and become a growth business again.
However, the upcoming results are important. I’ll be watching like a hawk and reading the report for further clues that the turnaround strategy has started working.
