The Boohoo (LSE: BOO) share price has been under pressure for some time. It is now back to levels last seen in 2016 having lost 74% of its value in just one year. However, the real damage has been done over the last three months, in which time it has halved. As an existing shareholder, this has led me to re-evaluate my holding.
Profit warning
The recent acceleration in Boohoo’s share price decline can be attributed to a hastily-convened analyst call back in mid-December. In that update, the company issued a profit warning for the financial year ending February 2022. It advised that sales growth would be in the region of 12-14%. This was considerably down on the 20-25% guidance it provided only three months earlier.
The company blamed the revised sales guidance on a number of factors, most of which were related to the global supply chain logjam:
- Reduced air freight capacity leading to 10-day delivery times for US customers
- Significant inbound freight cost inflation hitting EBITDA by approximately £20m
- In the UK, significantly higher returns rates, particularly for dresses
- Revised upward one-off costs related to warehouse and new branding structure
What existing shareholders (including myself) are trying to understand is why did management provide such overly optimistic forward guidance only to retract it so quickly. After all, most of the problems related to inflation and air freight capacity have been ongoing for some time. Therefore, it seems to imply that management did not do its homework properly when it issued its original guidance. For me, that does not paint a good picture. Add on the long-term issues related to working conditions at some Leicester-based suppliers and it’s not surprising that shareholder confidence has been dented.
Is Boohoo a buy?
Management remains convinced that most of the problems negatively impacting the business today are “primarily related to the ongoing impact of the pandemic and … transient in nature.” However, I am not 100% convinced. Firstly, I don’t believe that inflation is transitory. If that turns out to the case, then supply chain costs will remain elevated for some time. Secondly, wage-price inflation is really beginning to pick up in the economy, which could impact its bottom line.
When the pandemic does finally subside, there is a distinct possibility that international air freight and associated supply chain costs will normalise at a higher level, particularly with oil prices skyrocketing.
International sales, a key barometer for the company’s strategic growth ambitions, have undoubtedly taken a big hit. With competition in the space heating up and the company firmly on the back foot at the moment, it will need to spend heavily on marketing to woo customers back. The opening of its first US distribution centre in 2023 will help, but by then customers might have moved on, permanently.
Still, I think the long-term prospects for Boohoo are good. It has a proven business model and is building a distribution network capable of supporting in excess of $5bn of sales. I am expecting its share price to remain weak for the foreseeable future and much will hang on full-year results. At the moment, I am sitting on the sidelines with the intention of adding to my position should its share price fall further.
