The Joules (LSE:JOUL) share price collapsed over 40% today following the latest earnings report published by management. Due to the pandemic, the fashion retailer has had a rough couple of months. And following today’s decline, its 12-month performance is currently at a dreadful 56% loss. What was in this report that caused investors to freak out? And is this actually a buying opportunity for my portfolio? Let’s investigate.
Investor fears become reality
Since the last trading update, there has been growing concerns about the group’s profitability. Today, the veil of uncertainty was lifted to reveal investors’ worst fears. With the pandemic disrupting supply chains, and problems emerging in the group’s logistics operations, profits for the first six months of the 2022 fiscal year that spans May to May have dropped by 30%.
On the plus side, revenue over the nine weeks ending in January 2022 did climb by 31% compared to a year ago. And it’s actually ahead of pre-pandemic levels by around 19%. Yet this performance still remains below management’s expectations. To make matters worse, costs in its distribution centres doubled compared to a year ago due to UK labour shortages and were around £1.2m higher than anticipated.
Overall, I think it’s fair to say things aren’t going so great for Joules, and seeing its share price plummet as a consequence is hardly surprising. But is there a chance for a comeback?
Can the Joules share price recover?
In light of these problems, management has outlined its plan to tackle the situation. First off, the company is restructuring its wholesaling process. Minimum order value requirements are being introduced in the US, while any outstanding orders that are no longer profitable in the new environment are being cancelled.
Meanwhile, old inventory that’s moving too slowly is being liquidated. The marketing budget is being pulled back, and at the same time, the firm plans to increase the prices of its upcoming Spring/Summer range later this year.
The goal is to simplify operations and cut costs to improve profit margins. Whether this strategy will work, only time will tell. However, as of January, the company does have £11.5m of liquidity headroom at its disposal. And management believes this will be sufficient for the foreseeable future.
Assuming Joules is accurate in its assessment, I think it’s likely that the share price will be able to recover over the long term.
Time to buy?
While the sudden drop in Joules’ share price might be an overreaction by investors, it’s not unreasonable. Clearly, there are problems with operations. Whether this is only a short-term hiccup or a fundamental flaw in the company has yet to be revealed. Personally, I’m going to wait and see how management’s solution pans out before considering adding any shares to my portfolio.