Here we go again. The Boohoo Group (LSE: BOO) share price is down by 14% to 272p as I write. The fall has been triggered by press reports over the weekend suggesting the firm’s auditor, PwC, plans to resign.
Newspapers are suggesting that PwC may no longer be happy to represent Boohoo due to concerns over corporate governance. A 14% share price fall may seem serious, but I suspect the market is over-reacting to this news. Here’s what I’d do now.
What do we know?
Based on this morning’s statement from Boohoo, we know that it’s looking for a new auditor, but that PwC is still the current auditor.
PwC was reappointed for another year in June, so the timing of this change seems odd. One possibility I can see is that PwC has decided it doesn’t want to continue after seeing the results of the independent report by Alison Levitt QC into the Leicester sweatshop allegations.
Ms Levitt found “weak corporate governance” and said “Boohoo’s monitoring of its Leicester supply chain was inadequate”. But she was confident that the company had been taking steps to address these problems well before this summer’s negative press coverage emerged.
Boohoo share price: could be cheap
This company has become one of those investments that divides investors.
Boohoo fans say that issues such as the Leicester allegations and today’s report are just noise that can be ignored. They point out that the company’s sales rose by 45% during the first half of this year. Pre-tax profit rose by 51% over the same period.
With performances like this, bulls argue that nothing else really matters for shareholders. Eventually Boohoo’s share price will reflect this strong growth.
I agree that these are outstanding results. But on the other hand, I also think it’s fair to say that a company valued at nearly £4bn with experienced management should be able to avoid some of the controversy it’s generating.
Ms Levitt’s report concluded that “it is time for Boohoo to come of age”. I think that CEO John Lyttle, whose last job was at Primark, is likely to speed up this process by sharpening the company’s training and corporate governance.
Based on what we know today, I don’t think there’s a smoking gun at Boohoo.
What I’d do now
From a customer perspective, I think Boohoo’s results make it clear that this is a good business. Although the company has attracted some negative headlines over the last year, I can’t see anything so far that can’t be fixed.
Assuming Boohoo’s management is serious about resolving these issues, I don’t see any reason why Boohoo can’t continue to deliver strong growth. The only serious risk I can see is that something will happen to damage the group’s reputation with its customers. Right now, this doesn’t seem likely to me.
For these reasons, I’m going to stand by my previous view that Boohoo’s share price could return to 400p+. Investors may face some short-term volatility, but I think the long-term growth story here remains strong.