The boohoo Group (LSE: BOO) share price has fallen by 75% over the last year. The stock is now trading at levels last seen in 2016.
I’m not sure this is really fair. After all, boohoo’s profits last year were nearly six times higher than in 2016. Sales are still rising, too. Is this an opportunity for me to add a brilliant bargain stock to my portfolio?
Why has boohoo crashed?
To understand whether there’s an opportunity, I need to know what’s gone wrong.
First of all, boohoo is suffering from rising shipping costs and delays. US growth is being held back by having to ship customer orders from its UK warehouse. boohoo is building a US warehouse, but it won’t be ready until 2023/24.
In the UK, a sharp rise in returns rates is adding to shipping costs. Recently acquired brands such as Debenhams are also sucking up marketing spend. Reinventing old brands isn’t always easy.
Taken together, these factors caused boohoo’s adjusted pre-tax profit to fall by 24% to £83m last year, even though sales rose by 61% to £1,983m.
Are boohoo shares cheap?
CEO John Lyttle believes that many of these headwinds are temporary. I think that’s possibly true. boohoo has always seemed to be a good retailer in the past.
I’m not too worried about the group’s operational issues. My main concern is the quality of boohoo’s brands. History suggests that some brands last, but others fade away over time. Youth brands can be especially short-lived. Predicting long-term winners isn’t always easy.
To be fair, I don’t think boohoo’s brands are the only reason for its share price weakness. I reckon much of the stock’s slump is down to market sentiment.
Online retailers soared during the pandemic, as home shopping boomed during lockdown. Things are now returning to normal, with a greater share of sales going to physical shops. In my experience, the market has a habit of overreacting to situations like this.
When boohoo shares peaked at 400p in June 2020, they looked too expensive to me. Now that the stock has fallen to under 75p, I think the forecast price-to-earnings (P/E) ratio of 15 is starting to look cheap for a growth business.
Should I buy boohoo?
boohoo has already completed significant upgrades and expansion to its UK warehouse capacity. This year, Lyttle plans to improve product sourcing to cut lead times and make a range of cost savings.
The company is aiming to hold on to the market share it’s gained over the last two years, while repairing the damage to its profit margins.
City analysts covering boohoo seem fairly optimistic. Their forecasts suggest that the group’s adjusted earnings will rise by 10% this year and by 38% in 2023/24.
These estimates put boohoo on a forecast P/E ratio of 16 for 2022/23, falling to a P/E of just 11 in 2023/24.
I think this could be a cheap entry point for this business, but I still have concerns about the quality of boohoo’s brands. For this reason, I’m going to stay on the side lines for now.