The share price of Boohoo (LSE: BOO) fell off a cliff after revelations about factory conditions just a few weeks ago. Since then the company has had to defend itself, and directors have piled into the shares. This has helped reassure investors – a bit.
Before that revelation, everything had been going so well. After the share price initially fell – along with nearly every share at the beginning of the pandemic – it had been rising sharply. This was driven by the realisation that everyone would shop online. The same trend that has seen Amazon’s share price also rocket. However, now the shares are under pressure once again.
Problems at Boohoo
The problems at Boohoo are not simple to untangle. One point of view is that the shares are much cheaper now and scandals like this unusually blow over and are forgotten in time. Other UK companies have been involved in scandals that proved non-fatal, from accounting errors right through to corruption and bribery in developing nations.
However, I think Boohoo’s recovery will be less smooth. It’s clear already there’s been no quick bounce back. Investors like Standard Life Aberdeen sold off Boohoo shares, which has put pressure on the share price. A rise in ESG investing is coinciding with this crisis.
Another factor that is going to act as a drag on the share price in my view is the unusually close relationship between Boohoo’s co-founder and other family members with fast-fashion businesses. For example, back in May Boohoo completed its acquisition of PrettyLittleThing from the co-founder’s son. I can’t be alone in thinking this arrangement benefits the family more than ordinary shareholders.
The acquisition followed criticism from a short-seller, Shadowfall, that raised questions over the amount of money Boohoo was likely to have to spend on buying out PLT’s shareholders.
Opportunities for ASOS
Do the issues at Boohoo create an opportunity for ASOS (LSE: ASC), which has faced its own struggles in recent years?
I think it’s really too early to tell. Up until just recently Boohoo was clearly the better share to own. The big question – whether ethics will trump price in the key young adult market – remains to be seen. I expect I’m not alone in thinking price will win out in the end and fast-fashion will remain a highly profitable industry.
Even if that’s the case, sales at ASOS don’t inspire confidence that it’s got all the answers or will be able to capitalise on Boohoo’s woes. Sales for the four months ending 30 June rose just 9% to £1.0bn. Given high street shops were shut, that doesn’t seem like a great performance.
Compare that to a trading update from Boohoo before the supply chain crisis engulfed it and ASOS looks more lacklustre. In the three months to 31 May, Boohoo revenue increased by 45%.
Right now I’m staying well clear of both shares. They are very expensive and Boohoo will come under increased scrutiny while ASOS still isn’t firing on all cylinders.
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Andy Ross owns no share mentioned. The Motley Fool UK has recommended ASOS and 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.