Shares in online fashion retailer Boohoo (LSE: BOO) have experienced a stunning collapse over the last 12 months. This time last year, Boohoo’s share price was near 350p. Today however, it’s sitting at 90p – the level it was at in mid-2016 (when sales were about a 10th of what they are today).
As a long-term investor who likes ‘growth at a reasonable price’, I see appeal in Boohoo after its huge share price fall. Yes, the company has experienced some challenges recently. However, I think the fall here is way overdone. Here are three reasons I’d buy BOO shares for my portfolio today.
Short-term problems
The first reason I’m bullish on Boohoo right now is that I see many of its problems short-term. At the moment, the company – like most retailers – is experiencing pandemic-related supply chain and inflation issues. This is impacting sales and profits.
However, I don’t expect these issues to last forever, and neither does Boohoo management. “We are confident that pandemic-related headwinds are short-term in their nature, and our focus is to ensure the business is well positioned for growth as these headwinds ease,” said Boohoo CEO John Lyttle in March.
If supply chain issues do improve, international sales should get a boost.
Long-term growth potential
Secondly, I think the growth story here is far from over. According to Statista, the global fashion e-commerce market is projected to grow from around $668bn in 2021 to $1,207bn by 2025. That represents growth of about 16% per year. This market growth should provide huge tailwinds for Boohoo.
Now, Boohoo may not get back to its growth rates of the past (30-40% revenue per year). However, with a strong portfolio of brands that includes Boohoo, PrettyLittleThing, Nasty Gal, Debenhams, and Dorothy Perkins, I see the group as well-placed to benefit from the growth of the market in the long run.
Cheap as chips
Finally, the stock’s valuation is now very low. For the year ending 28 February 2023, analysts expect Boohoo to generate earnings per share 5.5p. That puts BOO on a forward-looking P/E ratio of just 16.4. That valuation strikes me as a steal, given the long-term growth potential.
What are the risks?
Of course, investing is all about risks versus reward and in Boohoo’s case there are plenty of risks to be aware of. One is that supply chain and cost issues could linger for a while. We may not see these moderate until well into 2023.
Another risk is competition from rivals. The online fashion industry is highly competitive and there are no real barriers to entry. So Boohoo could lose market share to competitors. One competitor, in particular, that a lot of investors are concerned about is Chinese powerhouse Shein.
A third risk is that the corporate governance issues that have plagued the company in recent years could reappear. A fourth is that sentiment towards ‘fast-fashion’ stocks could deteriorate. Some investors don’t see these companies as very sustainable.
I’d buy Boohoo shares now
All things considered though, I think the risk/reward proposition here is attractive at the current valuation. I’m not expecting Boohoo’s share price to bounce back tomorrow. However, in the long run, I expect it to rise.