The recent performance of fashion retailer boohoo (LSE: BOO) has struck me, as a shareholder, as anything but stylish. The boohoo share price is down 80% over the past year.
That means I can now buy five boohoo shares for the price I would have paid for just one a year ago! Is that an outstanding buying opportunity to add to my position — or a value trap?
Sailing in a storm
I think the answer to that question depends on what happens in the coming years to boohoo’s business.
A share does not typically lose four-fifths of its value in just one year for no reason. boohoo’s profits have collapsed. After years of profit, it fell to a £4m post-tax loss last year from a £93m post-tax profit the prior year.
Cost inflation threatens profit margins and tightening consumer spending could hurt sales. The challenges for the sector were highlighted this week by awful results from fellow online retailer ASOS. Like boohoo, ASOS has lost 80% of its market capitalisation over the past year.
Clearly, online retailers are sailing through difficult waters. The fact that boohoo is not alone in feeling the pain offers me no consolation as a shareholder, however. The challenges to its business are real – and could still drag down the boohoo share price even after its steep fall.
Long-term mindset
Still, as an investor I take a long-term approach when it comes to investing.
Adopting that mentality, I ask myself whether people will still need to buy clothes in future – to which the answer is definitely yes. I also consider whether online retailers can thrive and again I think the answer is yes. I expect digital sales to take a bigger share of the market over time.
I then consider whether boohoo has a competitive advantage that could allow it to thrive in that environment. Again the answer looks positive to me. From its large customer base to a collection of famous brands such as Debenhams and PrettyLittleThing, I think boohoo has the capacity to perform well.
Why is the boohoo share price falling?
But I am looking at the same information as other investors.
Collectively, they have led the boohoo share price to fall 80% over the past year. So, am I missing something?
I do recognise risks like I discussed above. With a sharp cost focus central to many of its brands, boohoo cannot easily absorb cost inflation without either hurting profit margins or risking lower customer demand.
But I see the current share price as a potential bargain for my portfolio, albeit with notable risks. The market capitalisation is less than half a billion pounds – less than six times the company’s post-tax earnings the year before last.
Those profits already seem a long time ago and there is more tough sailing ahead in my opinion. But I see boohoo as a quality company trading at a highly attractive price. I already have a large position so to stay diversified I will not be buying more shares right now. If I held less than I do, I would happily buy more at the current boohoo share price.