I am always on the lookout for undervalued companies, particularly those where a fall in the share price appears to have gone too far and seemingly does not reflect the underlying fundamentals. The boohoo (LSE:BOO) share price is currently worth less than a fifth of what it was in September last year, so should I be adding this company to my portfolio?
Financial performance
boohoo is a fast-fashion online retailer and has grown rapidly since its stock market debut in 2014. Its 13 brands include PrettyLittleThing, Nasty Gal and MissPap, loved by its Gen Z and millennial customer base.
Annual sales increased by an average of 56% from 2017 to 2021, and its profit before tax soared from £31m to £125m over the same period. The company even prospered during the Covid pandemic. And yet, despite this track record of profitability, boohoo has never paid a dividend.
Since 2021, though, things have started to go wrong.
Sales growth slowed to 14% in 2022 and profit before tax fell to £8m. More worryingly, net cash was £276m at February 2021 but only £1.3m a year later.
The company blamed £60m of “pandemic-related shipping cost headwinds” (that’s inflation to you and me) and £35m of other acquisition-related exceptional costs.
What about the others?
But boohoo is not the only fast-fashion business crying its eyes out in the face of disposable incomes being squeezed and rising costs.
ASOS (“catering for all moments of a 20-somethings life”) does exactly what boohoo does and its share price has fallen by 79% over the past year.
This week, Associated British Foods issued a profit warning for Primark (“adored by fashion fans and value seekers alike”)and, when Missguided (“shopping is a right, not a luxury”) fell into administration earlier this year, it was rescued by Frasers Group in a £20m deal.
The slowdown of fast fashion
So, there are clear warning signs that fast fashion is now falling out of, er, fashion.
The industry gets a bad press for its throwaway approach to clothing, and there are increasing calls for consumers to boycott these retailers.
The last series of ITV’s Love Island ditched I Saw It First (“the ultimate one-stop-shop for the stylish generation”) as its main sponsor and went with eBay instead. The move to encourage greater recycling of clothes may well resonate with a generation of younger buyers who are easily influenced by their social media idols.
Time to wipe away those tears?
In July of this year, there was a glimmer of hope for long-suffering shareholders, when it was disclosed that the US hedge fund Citadel had taken a 5% stake in boohoo. The share price increased to 60p on the back of this news but, since then, everything has gone quiet and the shares have fallen back to around 43p.
Here’s the plan
So, am I going to dip my toe into the market and buy some boohoo shares?
The answer is no. I feel there are far too many downside risks to the boohoo share price and the fast-fashion industry as a whole.
Also, to compound matters, the absence of a dividend makes me want to cry.