Boohoo (LSE: BOO) has made a big impact on fashion retail over the past few years and has managed to grow revenues year-on-year for some time. This led to the Boohoo share price reaching an all-time high of over 400p last year, around 500% higher than its 2014 IPO price. But things have been far less pretty for the e-commerce company recently. In fact, in the wake of labour scandals and falling profits, the company is currently only priced at around 200p. So, should I be using this dip to add Boohoo shares to my portfolio?
Trading update
The Boohoo share price has been sliding for a while but more so since its half-year trading update, and it’s clear to see why. In fact, although revenues were able to increase 20% from this time last year, adjusted profit before tax was 20% lower. This was partly due to physical stores reopening and drawing customers away from online retailers, and partly to the added costs caused by raising wages for its workers. Although this was certainly necessary, it does also demonstrate the effect of its poor working condition scandal last year.
There are also likely to be issues for the full-year outlook. Indeed, the impact of inflation is likely to be felt by the company, and capital expenditure is now expected to be around £275m for the year, against a previous estimate of £250m. Therefore, adjusted EBIDTA margins are expected to be 9%-9.5%, lower than the previous guidance of 9.5%-10%. This declining profitability is an issue for the company, and something that could strain the Boohoo share price in the future.
Why I’d buy
Despite these negatives, there are several reasons why I’d buy the growth stock. For example, over the past couple of years, Boohoo has managed to double its market share in both the UK and the US. It also plans to open a new distribution centre in North America in 2023, which should help its American expansion. As such, while profits may have slightly decreased recently, there’s no sign that revenues are also going to decrease. Therefore, I believe that the drop in profits is just a short-term problem.
The valuation of the stock is now far more appealing. Indeed, for the next financial year, it is estimated that the company will have an earnings-per-share of 11.5p. As such, the company has a forward price-to-earnings ratio of 17.4. For a company that is seeing large revenue growth, this is not too expensive at all. Despite this, the company may not reach these estimations, and this could cause a drop in the Boohoo share price.
Even so, this lower valuation does reflect the rising competition in this market, including webstores like Shein and Missguided. This could potentially hit profits over the next few years.
What’s next for the Boohoo share price?
Despite the issues with the company, I feel that the Boohoo share price is now too cheap, and this recent dip offers a good time to buy. Indeed, the company has an extremely large customer base, and despite the reopening of shops, demand remains strong. Therefore, I’m very tempted to buy shares.
Stuart Blair 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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