The Boohoo Group (LSE: BOO) share price hit an all-time high of 433p in June. The stock then crashed to lows of around 210p in July, after press reports linked the firm to allegations of illegal working conditions in Leicester factories.
Founders Mahmud Kamani and Carol Kane dived in at that point, buying £15m of stock between them. With hindsight I should have taken this director buying more seriously. The value of those shares has since risen by 47%, netting the two founders a handy £7m profit.
However, although I’ve missed July’s recovery, I believe there’s more to come. I reckon there’s a good chance we’ll see Boohoo’s share price return to 433p over the next year.
What happens next?
Right now, the market is waiting for the results of an independent review into Boohoo’s Leicester supply chain. This was commissioned by the firm in July and is due to report imminently.
According to the company, an update on the review’s findings will be included with Boohoo’s half-year results announcement on 30 September.
The review should establish whether allegations of illegal working conditions in Leicester garments factories are true. If they are, it will consider whether Boohoo knew about them and whether the firm did enough to police its supply chain.
I was wrong about the Boohoo share price: here’s why
I was sceptical about investing in Boohoo after the Leicester allegations broke in July, but I’ve since decided I was probably wrong.
A lot of the press coverage about Boohoo has portrayed the firm as profiting from cheap UK labour. But the firm only makes 40% of its product in the UK, and this is done mainly for speed. Management says that UK production is actually more expensive, but it allows the company to bring new lines to market more quickly than if they were produced overseas.
It’s also worth remembering that the factories in Leicester aren’t owned or controlled by Boohoo. They’re independent businesses subcontracted to the fashion firm, possibly through another middleman.
As far as I can see, the only serious risk to Boohoo’s reputation (and its share price) will be if the independent review finds that the allegations about Leicester working conditions are true and that Boohoo knew about them and ignored the problem. I think that’s fairly unlikely.
Further gains seem likely to me
Even before July’s allegations broke, Boohoo was already taking measures to improve the audit programme it uses to monitor suppliers. I expect that any shortcomings the review does identify will be covered by these improved processes.
In the meantime, this still looks to me like one of the best growth businesses on the UK stock market. June’s trading update showed that the group’s sales rose by 45% during the three months to 31 May. Sales in the USA rose by 79% but are still only half the level of UK sales. I reckon this could be a huge growth market for the firm.
Analysts expect Boohoo’s earnings to rise by around 25% this year, with growth of 30% forecast for next year. If the firm delivers on these forecasts, I’d expect Boohoo’s share price to return to its previous 433p high.
If you’re happy to hold on to the shares for a few years, I think Boohoo deserves a buy rating at current levels.
Roland Head 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.