Over the past five years, the boohoo (LSE:BOO) share price is down a whopping 90%. In the last year, it’s down a more modest 17%, but the main theme is that the stock keeps heading lower. With a share price of just 29p and a market-cap of £374m, here’s why I’m concerned for the coming year.
Problems galore
Let’s first consider some of the recent issues the company has endured, along with my outlook from here.
One problem that’s still ongoing is the situation with Frasers Group. Frasers, financed by Mike Ashley, owns around 27% of boohoo. Last month, Frasers pushed for Ashley to become boohoo’s CEO, citing needed changes and criticising the business. However, boohoo’s management team strongly rejected this claim (and appointed its own chief executive), along with making accusations that Frasers was pursuing its own self-interest.
Clearly, this spat (which is ongoing) is an unwanted headache for other shareholders. What’s more, other problems are being flagged as part of this head-butting. For example, boohoo recently refinanced £222m worth of debt. It’s argued that this was done at a high interest rate and that it wasn’t good for the business.
I already noted that net debt increased from £95m to £148m from H1 2023 to H1 2024. The digital fashion retailer needs to be really careful about the balance needed on debt. During tough times, financing’s needed to help ease cash flow problems. But if it balloons too high, it has the potential to eat away at the rest of the company.
Penny stock outlook
If the market-cap falls below £100m and the share price stays below 100p, boohoo could technically become a penny stock next year. Even though this could happen, I think this is the worst-case scenario.
If I look at the latest financial results, the business has net assets of £148.3m. So it’s virtually impossible for the market-cap to fall below £100m if the net asset figure’s that high. Of course, the net asset figure could fall. This could happen if more debt’s taken on or if existing machinery and equipment depreciates heavily. But it’s unlikely it would happen to such an extent.
However, I do expect the company to be closer to becoming a penny stock this time next year than right now. The price-to-book ratio’s 1.45, still above what I would use as a fair value of 1. This ratio compares the share price to the book value of a business. I feel that the share price could move lower, bringing this ratio down to 1, before I’d consider the stock to be undervalued.
The flipside
I could be wrong. If the new CEO manages to spark a change at the company, a successful transformation could be under way. Cost-cutting and a disciplined approach to inventory could help reduce the need for more debt. This could ultimately translate to a higher share price in the years to come.
Yet from where I’m sitting right now, it’s too much of a high-risk investment for me.
