My lack of market timing skill has never been so apparent as in my investment in boohoo (LSE: BOO). Since I bought in November, it has lost approximately two-thirds of its value. The boohoo share price has fallen 66% over the past 12 months, and it’s even down 30% over the past five years.
Growth stocks do often go through ups and downs in their early days. But such a big drop, even after five years? That’s getting close to a loss even with a long-term horizon. So what went wrong, can the shares recover in 2022, and what should I do now?
With hindsight, I think there was still too much of a Covid-19 effect helping the boohoo share price. Investors had turned away from traditional retailers who were damaged by pandemic restrictions. And the money went into sellers with less exposure to our infected high streets.
I did think the boohoo valuation was still attractive, mind. It wasn’t super low, but it looked good in comparison to the company’s growth prospects. Or so I thought. That growth has been shaken of late. Costs have risen, and revenue growth is slowing. In its Q3 trading update, boohoo recorded a 16% rise in total net sales for the nine months. But the third quarter saw an increase of only 10%. The quarter’s sales were up in the UK, but fell across the rest of boohoo’s world markets.
Downgraded outlook
The company downgraded its full-year outlook. Previous guidance had suggested 20%-25% growth in net sales. But as of December, boohoo slashed it to 12%-14%. And we’re now looking at an expected EBITDA margin of only 6%-7%, down from the 9%-9.5% previously indicated.
As for costs, boohoo expects an exceptional hit of around £33m for 2021, compared to previous guidance of £22.5m. The company put that down mostly to warehouse and new brand restructuring. Freight costs are up too, as they are across the whole of the economy.
The big question for me, now, is whether the sell-off is overdone and the boohoo share price is too cheap. I think the answer is yes. Analysts are already predicting a strong return to earnings growth over the next couple of years. And the company itself says it is capable of “returning towards normalised growth rates of 25% per annum post-pandemic“. Of course, we can’t be sure exactly when “post-pandemic” is going to be.
Boohoo share price future
I can see two possible scenarios here. One is that boohoo is genuinely at the end of its rapid growth phase, and my optimism is misplaced. It has to happen eventually, with the company settling into a mature phase of lower growth. If we’re already reaching that transition, I suspect boohoo will be able to sustain price-to-earnings valuations only around the market average. And the share price will probably remain low.
But if we instead see a return to more years of faster growth, I think that would make the boohoo share price look cheap now. On balance, I’m likely to buy more shares. But I might wait for 2021 full-year results and see how painful those are first.