boohoo (LSE: BOO) is by far the worst-performing stock in my portfolio. Having bought the shares just over a year ago, I’ve seen their value collapse. In the last six weeks alone the share price has fallen by 40%. So, does the investment case for this former growth darling still stack up?
Issues on multiple fronts
boohoo will release its full year results next week. After rival ASOS swung from a profit to a loss when it reported, the expectation in the market is that boohoo will disappoint too.
Over the past couple of years, the company has faced a litany of problems. I was aware of each before I invested. However, what I failed to appreciate was the pernicious effect of inflation on its bottom line.
As the world emerged from Covid, and supply chain bottlenecks became evident, this had a direct impact on its unique selling point, namely the breakneck speed of getting its new designs to market.
Elevated freight costs and supply chain problems may have eased recently, but the more intangible side of high inflation has been changing consumer behaviour. If inflation does become entrenched in the economy, then costs will continue to eat into margins. Raising prices is unlikely to go down well with a consumer who goes to boohoo partly because of its low prices and who’s already being squeezed.
Long-term view
Despite significant challenges, the key reason why I invested in boohoo was its long-term growth potential.
The company has demonstrated its ability to lead the fashion e-commerce market. It has a large and growing social media presence. It’s also adept at buying and integrating into its business popular brands that hit problems following their collapse into administration. This includes the likes of Debenhams and Dorothy Perkins.
The company continues to invest heavily. Its distribution centre capacity has been extended through the acquisition of two new facilities in Wellingborough and Daventry. An investment of £125m into automation at Sheffield should lead to warehouse cost reductions.
The opening of a US distribution centre (DC) in the second half of 2023 will mean that stock will be shipped directly from its suppliers to its US DC rather than having to go via the UK. Such a move will bring down international delivery times significantly.
A viable business model?
In an era when ESG principles have shot right to the top of both investor and consumer agendas, many question whether fast fashion has a future. The well-documented Leicester factory scandal is a prime case in point.
The industry undoubtedly has a problem in this area. Some of Chinese fast fashion retailer Shein’s suppliers have faced allegations of worker abuses. There are reports US lawmakers are seeking to block its IPO later this year.
Ultimately, I think that the sector has a whole will evolve. If anything, boohoo is ahead of the pack in this respect.
I don’t know how long its woes will last. But I’m confident in the future of this market and boohoo’s place in it.
As the share price languishes 90% off its all-time high, an investor thinking long term with a stomach for volatility, could snap up some shares in the expectation that they won’t trade at this ultra-low price forever. I certainly will buy more when finances allow.
