Key points
- Supply chain issues and labour abuse allegations continue to plague the boohoo share price
- Good historical growth data on revenue and profit
- Company is addressing problems and could be a good long-term investment
With the decline of the high street, many shoppers have turned to online fashion retailers to purchase clothing. An AIM 100 constituent, boohoo (LSE: BOO) represents the e-commerce sector. In the past year, however, the boohoo share price has fallen around 70%. What are the causes of this collapse? Indeed, I want to know if this stock is now oversold and it is time to buy some for my portfolio. Let’s take a closer look.
Factors negatively impacting the boohoo share price
Troubles began in summer 2020 with serious allegations that workers of boohoo’s clothing suppliers were being paid well below the minimum wage. This allegedly occurred at factories in Leicester. The market responded very negatively to this news, with the boohoo share price falling massively by 42.5%.
This issue resurfaced the following summer, with workers alleging that they were being paid only £3.50 per hour. While the company has taken measures to address these allegations, like publishing its global supplier list, this problem has been left hanging over the boohoo share price.
Many of the stock’s problems, however, are due to the pandemic. In December 2021, the company issued a profit warning. This was largely due to supply chain issues and higher return rates of clothing.
Unsurprisingly, a number of institutions have slashed their target prices for boohoo this month. RBC cut the price from 330p to 150p and stated that boohoo’s “international proposition remains uncompetitive”. Liberium acted similarly, slashing its price from 360p to 200p because of the “supply chain logjam”. This latter issue, however, may well subside in the short term.
Why this stock should improve in the long term
In the last five fiscal years, boohoo’s revenue has increased sixfold. Furthermore, profits have grown by 400% for the same period. Indeed, the company’s earnings per share (EPS) record is impressive, registering an average annual growth rate of around 31.8%. From this longer-term fundamental analysis, the boohoo share price should start to reverse its recent poor form.
While the recent trading update for the three months up to 30 November 2021 warned on profits, the report also stated that its year-on-year total net sales were up 10%. Indeed, this figure had increased 53% compared to the same period two years previously.
What’s more, the company has recently commenced building at its first ever production site in Leicester. The factory, which creates 180 jobs, will also act as a training facility for many suppliers. For me, this is evidence that boohoo is seriously addressing the labour abuse allegations.
Pandemic issues have clearly plagued the boohoo share price. Ongoing labour abuse allegations compound the negativity. However, the world is reopening and supply chain problems should soon subside. Recent developments are also tackling the sub-standard pay issues. While I won’t be buying shares immediately, I will be keeping an eye open for the aforementioned problems being resolved. When this happens, I will be purchasing boohoo stock.