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Boohoo share price: Here’s what I’m doing after it plunged (Hint: It’s not what you think)

Online clothing retailer boohoo (LSE: BOO) has had a rough week in the stock market. Its share price started falling last week after it was revealed that working conditions in the factories in its supply chain were abysmal. In a week’s time, the boohoo share price fell 44%. Even though it’s still much below last week’s levels, however, it has started recovering now. As of Thursday’s close it was up 27% from the day before. 

Positives for boohoo

Clearly, investors have re-adjusted their perspective on the boohoo share price. I don’t blame them. BOO has a lot going for it. It’s trading update in June showed a huge 45% increase in revenues. There’s more. This growth rate can’t be chalked up just to a lockdown spurt. It’s true that e-retailers like Amazon or closer home, Ocado, have seen a sharp sales increase. But in boohoo’s case, even its year-end results, for up to February, showed 44% revenue growth. This means that it has maintained its growth from the pre-coronavirus times. It follows that it can keep up with this growth going forward. 

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It’s no surprise then, that while many other FTSE-listed stocks are still struggling, the boohoo share price was at all-time-highs before the latest news broke. Its price-to-earnings (P/E) ratio is a high 53 times right now. And this is when its profit before tax grew by a whole 54% in the last full year. In other words, investors are ready to pay quite the premium for the BOO share. 

What could go wrong

Now that allegations of poor working conditions have surfaced, I’m not sure if the party will continue for the boohoo share price over time. For one, its financial performance can be impacted. If there’s evidence of rampant below-minimum wage payments, BOO’s costs can take a hit. If it keeps prices competitive despite this, however, its margins will be squeezed. With its products being dropped by big third-party retailers, its topline can also come under pressure. The extent to which BOO gets impacted will be known only over time. But it’s a risk that needs to be underlined right away, because it might impact returns for long-term investors. 

Boohoo is also likely to have fallen from grace for ethical investors. Even though it defended itself, the fact is, that poor working conditions have been reported in its context earlier as well. Financial Times, for instance, did an investigative report on this two years ago. If nothing has changed in that much time, can it convince investors now that they will? ‘Woke’ investors may be a relatively small number, but they can still impact the BOO share price marginally.

What’s next for the boohoo share price

Looking at BOO in its entirety now, it appears to me to that it can be hurt pretty badly both financially and reputationally. There are trading gains to be made in the near-term, but I would encourage the long-term investor to wait and watch what before investing in the boohoo share price, at what seem to be attractive levels.

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.