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Will the Boohoo share price recover in 2021?

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The Boohoo (LSE: BOO) share price has fallen nearly 19% over the past 12 months. Over the same period, shares in the company’s online fashion peer, Asos, have increased in value by 40%. This means shares in the former have underperformed those of the latter by 59%!

The question is, will the stock turned things around in the second half, or is the company going to continue to underperform?

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The Boohoo share price outlook

It’s impossible to predict what will happen to share prices in the short and long run. However, in theory, a stock price should track a company’s underlying fundamental performance. Therefore, if Boohoo’s profits grow, the stock price should also rise, although this isn’t always the case. 

Indeed, over the past 12 months, Boohoo’s fundamentals have improved dramatically. Sales increased 41% year-on-year for the group’s financial year ended February. Meanwhile, profit before tax increased 35%, and adjusted earnings per share jumped 47% to 8.7p

Boohoo has been one of the pandemic’s big winners. Consumers have flocked to its online offer as brick-and-mortar stores have been forced to shut. Management has used some of the windfall profits to buy some struggling brands, increasing is offer further still. 

It looks as if the corporation is firing on all cylinders. But the Boohoo share price has still struggled. 

Struggling

I think there are two primary reasons why. First of all, last summer, the company was hit by evidence of labour abuses among its UK suppliers, including paying workers far below the minimum wage.

While the enterprise has tried to rectify these issues with an investigation and cutting ties with specific suppliers, it seems there’s still a cloud hanging over the business. 

Secondly, the stock looks a bit pricey. It is trading at a forward P/E ratio of around 46. This could be sustainable if the company’s growth continues, but that’s not guaranteed.

As the economy reopens, consumers may return to brick-and-mortar stores, leading to a growth slowdown at the business. This could hurt the Boohoo share price. 

Uncertainty prevails

All of the above suggests to me that the outlook for the Boohoo share price is quite uncertain. The company’s growth is impressive, but if growth slows, then the stock looks expensive. What’s more, it could take some time for the digital retailer to rebuild trust with its investors. 

That said, I’m incredibly encouraged by the group’s impressive growth, portfolio of brands, strong balance sheet and online operation. I think these qualities will help the business prevail over the next few years.

As such, while I think the outlook for the Boohoo share price remains uncertain, over the next few years I think there’s a strong chance its profits will continue to increase.

And as profits continue to increase, the company’s stock price should reflect that. On that basis, I’d buy the stock for my portfolio today as a buy-and-hold growth play. 

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Rupert Hargreaves has no position in any of the shares 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.

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