For the first time in over six years, the boohoo (LSE: BOO) share price has fallen below 40p. For existing shareholders — and I’m one — this has been a particularly painful experience. The burning question for me is can this former growth darling ever recover, or should I throw in the towel and sell out?
A year to forget
The present woes for the company can be traced back to a hastily convened analyst call in December 2021 where the company revised down its growth forecasts from only a few weeks earlier. Since issuing that profit warning, boohoo’s share price has collapsed and is down over 70%. Over the past 12 months it has lost 85% of its value.
For the quarter ending 31 May, revenues declined 8% on the same period in 2021. Admittedly, part of this could be explained by pandemic-fuelled spending which made for a tough comparator. Nevertheless, as 2022 has unfolded it has become apparent that boohoo’s troubles are anything but, what management once described as, “transient in nature”.
Issues stacking up
In the US, a key growth market, international parcel delivery stands at 10 days. Such a proposition will not resonate with fashion-conscious teens and 20-somethings planning their next night out.
Costs are rising across the business. This is being driven by inflation, supply chain snarl-ups, higher salaries and large fixed costs related to the expansion of its planned opening of a US distribution centre. As a result, the business has implemented double-digit price increases.
A surge in returns, coinciding with the ending of lockdown, has normalised at a new higher level. It presently stands at over 30%. Given such stats, it’s little wonder that it has started charging for returns.
Patience required
I’m not expecting underlying trading conditions to improve for boohoo anytime soon. Nevertheless, a strong case can be made that its share price sell-off has been completely overdone.
Citadel, a leading US hedge fund, recently acquired over 5% of the business. Clearly, it believes that the company has been oversold.
Many of boohoo’s problems are outside of its control. But not all. This includes those related to poor working conditions in its supply chain. But the business has worked hard and has moved on from those mistakes.
The opening of a new distribution centre in the US in 2023 should be a game-changer. This will house key brands including boohoo, PrettyLittleThing, Nasty Gal and Karen Millen. As delivery times in that market tumble, the company believes demand will come back.
In addition, the business has invested heavily in automating its Sheffield distribution centre. With the intention of automating its other three UK centres, this should help cut down its cost base.
In the short term, boohoo’s share price is likely to remain volatile. Any nasty surprises in its half-year results due out later this month, could lead to further significant falls. If they’re bad, it’s not inconceivable that it could retest its all-time low of 20p.
However, with a long-term investing horizon, I’m less interested in short-term price movements. At its present price, I believe it offers the potential to supercharge my future returns. That is why I recently bought more of its shares.