The Boohoo (LSE: BOO) share price plunged last week after reports emerged of poor working conditions at a factory of one of its suppliers Leicester. Following these declines, it fell back to levels last seen in April, which makes the stock look cheap compared to its recent trading performance.
However, before investors buy into this growth story, it might be worth considering what could happen to the Boohoo share price in the worst-case scenario.
Boohoo share price declines
Since the initial accusations against Boohoo emerged last weekend, the company has ordered an independent review of its UK supply chain. It has asked a senior barrister to lead the investigation, which will take place over the next few months. It is also spending £10m to “to eradicate supply chain malpractice.“
However, this isn’t the first time the company has been accused of poor working practices. Similar accusations emerged last year. And this time around, sellers have started to turn on the business. Retailers Next and Asos have dropped goods from their virtual stores.
If sales start to fall, the Boohoo share price may decline in the short term. But in my view, over the long run, the business should be able to navigate this crisis. The online clothing market is booming, and Boohoo is one of the world’s leading online fashion brands. This gives the company a definite competitive advantage.
Nevertheless, it is clear that the company is going to face higher costs going forward. The £10m outlay to improve its supply chain will come out of the group’s bottom line. The firm may also have to increase the prices it pays to suppliers. That would compress profit margins in future.
Higher costs could have a significant impact on the Boohoo share price over the long run. City analysts were expecting the company to report a net profit of £93m for 2021. The £10m supply chain cost will reduce this by 11%. Higher production costs may reduce future income. Also, retailers’ boycotts of the brand may impact sales.
Difficult to predict
It’s difficult to tell what the future holds for the Boohoo share price. The big problem is uncertainty.
This may be a flash in the pan for the company or it could become something much worse. It has been reported that Boohoo is facing a modern slavery investigation, which could result in a high court injunction or an unlimited fine. Therefore, this could be just the beginning of a prolonged period of uncertainty for the Boohoo share price.
All of the above makes it difficult to predict the impact of the crisis on Boohoo and the company’s bottom line. As such, it might be best to stay away from the stock for the time being. There are plenty of other growth stocks out there on the market that have similar growth potential and are not under investigation.
Rupert Hargreaves owns no share mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and ASOS. The Motley Fool UK owns shares of Next. The Motley Fool UK has recommended boohoo group and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.