It has been an unrewarding time to be a shareholder in boohoo (LSE: BOO). In 12 months, the boohoo share price has fallen 81%. While rivals like ASOS have also been struggling, that does not make me feel any better as a boohoo shareholder.
So, is the price collapse signalling that boohoo has poor prospects? Or is it a buying opportunity that five years from now will look like a steal?
Industry challenges
Boohoo has some problems of its own making, but many of its current challenges are faced by the retail industry as a whole.
Cost inflation threatens to eat into profits. Indeed, in its most recent trading statement, the firm specifically mentioned “inflationary factors that negatively impact costs” as a challenge for its business. Inflation is a risk across the whole retail sector, but it could be particularly problematic for budget retailers like boohoo. Given their low price tags, even a small increase in price can seem significant to the shopper, compared to much more expensive items.
Fast fashion also faces an increasing risk from regulation designed to reduce its environmental impact. That could add costs that eat into profits. boohoo has faced negative publicity for conditions in its supply chain, although I do think it has made serious efforts to try and improve its reputation.
Taken together, all of those factors add up to a perfect storm. Last year, boohoo’s pre-tax profits fell over 90%. After tax, its profit and loss account ended up in the red. From £276m at the start of the year, it ended it with just £1.3m in net cash.
Tumbling boohoo share price
So far, so dismal. Looking at the list of challenges above, it is easy to understand why the boohoo share price has collapsed.
But has this fall been overdone? Clearly people are still going to need to buy clothes in future. If anything, I would expect a worsening economy to boost not hurt sales at cheap and cheerful retailers like boohoo.
That could be good for revenues, and indeed after a period of falling demand, it returned to net sales growth last month. But what about profits? That, I think, will be a bigger challenge for the company. A lot of cost factors are not under boohoo’s control. If shipping costs or production prices are going up across the industry, I do not think it can do much to stop them rising.
What it needs to do is figure out how to pass on such price rises to customers without losing sales. I think it will manage to do this. But so far progress has been slow. Understandably that has not impressed many investors.
Is the price a steal?
I think the boohoo price could turn out to be a steal, if the business fixes some basics like managing inflation so it does not hurt profitability. Its underlying business remains strong, with popular brands and an established customer base.
But it remains to be seen whether boohoo is up to the task of successfully battling inflation. I think it is, which is why I have been buying the shares for my portfolio. But clearly not all investors share my optimism. There are definitely risks here, which help explain the fall in the boohoo share price.