It could be an interesting week for those who own shares in boohoo (LSE:BOO). I must say that I’m relieved I’m not one of them. Its share price has plummeted 85% in the last 12 months and there may be worse to come. In fact it’s the most shorted stock in the UK ahead of the online retailer’s half-year results tomorrow. But despite a gloomy economic outlook, there could still be a bull case. Is it convincing enough for me to add boohoo shares to my portfolio?
A tearful 2022
The company posted a 1% drop in UK revenue while overall sales plunged eight percent in the three months to 31 May. That was the first UK sales drop in boohoo’s history. It pointed to supply chain disruption and increased competition from international players such as Shein as the reason for the issue.
While boohoo was a beneficiary of the pandemic-induced boom in e-commerce, it has since been hit hard by the cost-of-living crisis. As disposable income falls, new clothes may not be the priority for many of us. Also, online retail is a crowded market and customers expect low prices. Therefore inflation threatens to squeeze profit margins and any price hikes could lead to a fall in boohoo’s market share.
As the group looks to expand and get back to growth, demand is essential. After a poor first quarter, the half-year report will need to show significant improvements. We should have a better idea tomorrow about whether its forecast for single-digit full-year growth is realistic, but even if it is, the macroeconomic headwinds will remain.
A path to growth
I certainly expect volatility in the short-to-medium term. However, if boohoo rides out this economic turmoil, there’s a path back to growth through its recent investments.
The group is investing heavily in its supply chain in order to crack the US market. Operations should start at a new distribution centre in Elizabethtown, Pennsylvania next year. And it has invested in rolling out automation across distribution centres in its core UK market. These investments are vital to meet consumer expectations of fast fashion.
As well as market diversification, boohoo has invested to diversify its consumer demographics. It has long appealed to the younger generation who are most likely to be cash-strapped in tough economic periods. After acquiring brands like Debenhams and Dorothy Perkins, it could unlock fresh growth from different demographics to those who shop on NastyGal and PrettyLittleThing.
Am I buying boohoo shares?
Can the group pull off the US expansion and implementation of greater automation? If so, the market may once again value boohoo as a growth stock, making today’s price look like a bargain. I do see value in the stock as it’s trading at less than six times its 2021 earnings. That being said, demand needs to hold up in order to make a success of its ambitious investments. If the half-year results are weak, there could be further significant falls in the share price to the delight of the short sellers. For now, I won’t be investing in boohoo, but I’ll be paying close attention to tomorrow’s results and guidance.