It has been a torrid few years for boohoo (LSE:BOO). Some of the problems have been self-inflicted, but others have been out of the management team’s control. Whatever it boils down to, the fact that the boohoo share price is down so heavily in recent years makes me wonder if (and when) a comeback could happen.
Problems should fade
I’m only going to focus on issues that have happened over the past year, as these are the most relevant for a potential investor like myself. The 2023 report showed a loss before tax of £159.9m. This was higher than the loss of £75.6m from the year before.
The CEO commented that this reflected “difficult market conditions, caused by high levels of inflation and weakened consumer demand.”
This is true, but both of those factors actually give me confidence in a potential turnaround for the company. Inflation has fallen rapidly in recent months, and is now back at just 2%. This is the target level for the Bank of England. I know that high inflation is a problem for boohoo, as everything from fabric costs through to wage pressures go up. But with this now back under control, I don’t think it should be a problem going forward.
Weak consumer demand is another temporary factor. The cost-of-living crisis isn’t over, but it’s not as pronounced as it was in 2023. For example, May GDP for the UK grew by 0.4%, double the estimate from economists. If the economy continues to grow at a faster than expected pace, it should mean that boohoo (and other consumer facing companies) see a demand spike.
Better finances
Another factor that should help the share price going forward is lower costs. The efficiency drive started last year is expected to deliver £125m of annualised cost savings. Further, during the past year the firm completed a major warehouse automation installation in Sheffield. This should help to cut manual costs but also increase scale.
So let’s fast forward a year. The business has lowered costs, and isn’t feeling the pinch from inflation. At the same time, revenue is higher as consumers are feeling more positive about the economy and their personal finances. This double boost could easily help to flip the firm back to being profitable. In this scenario, I’d expect the share price to rally hard.
A competitive landscape
Despite all the efforts, I’m conscious that a constant risk is the fast paced nature of the fashion sector. Competition is really tight, and if boohoo doesn’t keep up with the changing tastes of consumers then it can very quickly get left behind. Then there are nimble rivals like Shein.
It’s also true that a multi-year fall in the stock doesn’t get erased over just a few months. Yet given how highly the firm has been valued in the past, I think the potential reward is high here. I’m seriously considering getting involved and buying a small amount of boohoo shares.
This post was originally published on Motley Fool
