Taking advantage of short-term Boohoo (LSE:BOO) share price weakness to load up on now-cheap shares: is this a strategy that will serve investors well?
The Manchester retailer, which owns brands including Pretty Little Thing and Nasty Gal has seen more than £1.1bn wiped from its value in the last two days.
On Tuesday 7 July, heavy selling continued, with another 12% sliced from the Boohoo share price. That takes the share price loss since Monday to 35%.
Explosive
The market is still digesting a bombshell investigative report alleging severe malpractice at one of the company’s suppliers.
An undercover Sunday Times reporter uncovered illegally low wages of £3.50 an hour being paid at a Leicester garment factory linked to Boohoo. The minimum wage for over-25s in Britain is £8.72.
The report found that staff were not wearing protective masks to limit the spread of Covid-19. And the story was accompanied by comment from an “appalled” Home Secretary Priti Patel decrying “slavery” working conditions.
The expose could not have been much worse for the company. Leicester is now subject to a local coronavirus lockdown after a recent spike in cases and the world is concerned about a second wave of the pandemic.
Boohoo replied in a statement to investors: “Our early investigations have revealed that Jaswal Fashions is not a declared supplier and is also no longer trading as a garment manufacturer“. It added that, if found to be true, the worker’s pay was “totally unacceptable“.
Boohoo share price bump?
Holders can perhaps take some small comfort from one fact. A 25 May short-seller report by Shadowfall Research alleging the online fashion giant overstated cash flow by £32m barely moved the needle.
But the shine has been well and truly wiped off the largest AIM-listed company.
Before Monday’s crash, a £5,000 investment in the Boohoo share price in 2014 would have yielded £68,500. That’s a gain of 1,371%. But anyone with Boohoo in their portfolio today will be nursing heavy losses.
Sales up
With the Boohoo share price now languishing around the 265p mark, is there value to be had in a punt? I’d say yes.
The fact is that Boohoo sales have surged in the last three months. The company has been rewarded handsomely by increased online shopping trends during the coronavirus lockdown. And bosses could be in line for potential bonuses worth £150m.
That incentive plan would have to see Boohoo’s market cap rise to £7.55bn by 17 June 2023, a 66% hike from the £4.45bn measured on 16 June.
Margin call
The focus on ever-improving margins will be firmly in the spotlight now, given the state of the undercover report. But the Boohoo share price has gained so strongly because of massive market share gains in the last 12 months, which poses a tough barrier to entry for newer retailers.
And Boohoo’s fast acquisition strategy, snapping up Coast and Karen Millen, opens up the more premium end of the fashion market.
Revenue passed £1bn for the first time in the last 12 months.
Don’t get me wrong, this would definitely be a contrarian buy. And I would certainly caution that financial reporting standards on AIM are lower on the FTSE 350, so make your choice wisely.
But by capitalising on short-term weakness to grab a relative bargain, investors can make some of their best gains.