The Boohoo (LSE: BOO) share price slumped 14% in October, even after the company reported a solid trading performance in its interim results at the end of September.
Following last month’s slump, the stock has fallen more than 40% year-to-date and by 31% over the past 12 months.
What’s behind the Boohoo share price decline?
At the beginning of October, following the publication of the group’s interim results at the end of September, City analysts were publishing their thoughts on the company’s outlook.
Broadly speaking, analysts were concerned that the company’s growth did not live up to expectations. It also reported an additional £26m charge related to rising shipping costs. Analysts speculated that this could extend into the second half.
The broker Berenberg summed up the City’s thoughts, noting: “Uncertainty clearly remains and at this stage some caution about the outlook is certainly warranted.“
It seems to me that this is the main reason why the Boohoo share price performed so poorly in October. The market hates uncertainty, and rising costs, as well as a worse-than-expected trading performance, increased anxiety among analysts and investors.
These anxieties only added to existing concerns over the company’s labour and supplier issues, as well as an ongoing lawsuit in the US regarding Boohoo’s pricing.
The good news is, the company is making progress on both of these fronts. Yesterday, the organisation announced that it had reached a preliminary settlement with parties bringing the class action claim against the group in the US.
Management has also been trying to alleviate concerns among analysts regarding the company’s supplier issues. It recently invited analysts to meet suppliers in Leicester, which seems to have gone down well.
Company potential
I think the fast-fashion company is making progress in changing the market’s opinion of the business. Unfortunately, it could be sometime before the cloud of uncertainty surrounding the group’s sales and profit outlook begin to lift.
This suggests that the stock will remain volatile, but that could be an opportunity. I have always been impressed by Boohoo’s ability to capture market share and shift with the times. I think the company still has this mentality, which should shine through in the long run.
That is why I would take advantage of the current uncertainty to buy a position in the stock at a discounted valuation. At present, the Boohoo share price is changing hands at a PEG ratio of just 0.7. A ratio below one suggests the investment could offer growth at a reasonable price. This figure is based on City growth estimates for the next three years.
Still, there will always be a risk that the group will not meet those City expectations. It could also encounter further supply chain turbulence, which would increase operating costs and depress profit margins. In this situation, the stock could see further selling pressure.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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