Boohoo (LSE: BOO) is one of those ‘growth stocks’ that unfortunately hasn’t done much growing lately. Quite the contrary. In a spectacular reversal of fortunes, the Boohoo share price has plummeted from near all-time highs between February and April 2021 when it regularly traded at over 340p per share, to trading at 87p yesterday. That is a 70% decline in a year. Naturally, investors have been wondering what happened. Perhaps more importantly, will the Boohoo share price rebound?
Scandalous fashion
ESG is a buzzword in commercial circles right now. The term is an acronym for environmental, social and governance. Investors have increasingly been considering these non-financial factors in their investment decision-making. It therefore comes as no surprise that when allegations that Boohoo tolerated serious failings regarding worker treatment at one of its Leicester suppliers, this was cause for alarm. It turns out being implicated in worker exploitation is not a good look.
While this revelation by several media outlets did not immediately cause the Boohoo share price to plummet, investors have slowly moved away as more and more news came out on the issue. To its credit, Boohoo has cut ties with some suppliers but it seems like the reputational damage has been done.
Not dressed to impress
Labour practices aside, the Boohoo share price could have even rougher days ahead. At the half-year mark in August, last year Boohoo reported sales of £976m. That is 20% higher than the same period for 2020/21. This was great but didn’t translate to any growth in actual pre-tax profits, which sat at just £24.6m. This indicates that after the taxman is done, the net margins on this business will be no more than 3%.
This assumption is bolstered by the fact that Boohoo has downgraded its full-year outlook. Initially, sales were expected to grow 20%-25%. That has now been revised downward to 12%-14%, around half of earlier expectations. As if that was not enough, inflationary pressures threaten to make that bottom line even thinner. Rising inflation means rising shipping, wages and marketing costs. These costs cannot simply be passed onto consumers when higher interest rates may mean less spending anyway.
Cheap fashion, cheap share price
So there are real issues here, but is the Boohoo share price simply too cheap to ignore? Some of my colleagues at The Motley Fool seem to think so. They point to the factors such as how revenues have increased almost six times in the past five years, the fact that Boohoo is investing heavily in new premises and that the supply chain issues that have affected the company should fade as the world exits the pandemic. These are fair points.
The current price-to-earnings ratio of 9.96 is low enough to indicate that there is value here. The stock could be picked up right now on the cheap and may show some positive growth. Nobody knows when this will be though. But I am of the opinion that come earnings day in April of this year, the market may have more cause for pessimism and that’s why I am not betting on a major rebound any time soon and not buying the shares.
