Yesterday brought cheer for shareholders in Boohoo (LSE: BOO), with the online retailer rising by around 8% at one stage. The Boohoo share price has lost a fifth of its value over the past year — but I think we may be seeing the start of an upwards movement. Here’s why.
Boohoo and a difficult year
While retailers as diverse as Next, Greggs and Marks & Spencer have cheered investors over the past year with their performances, Boohoo has struggled. Its sales have grown strongly, but margins have been under pressure. Supply chain issues have hurt the company’s reputation too.
That helps explain its weak performance over the past year. But a look at the Boohoo share price chart is revealing.
Since February, the shares have been on a downwards trend. In the past month, they have fallen steeply. But starting last week, they have been moving up again. That doesn’t necessarily mean the rise will continue. Shares sometimes stage a small recovery and then continue heading downwards. But it could also mean that traders think Boohoo shares have reached a bottom and are now more eager to purchase them. That momentum could boost the share price.
The Boohoo share price and business fundamentals
Judging a bottom (or top) in any share price is notoriously difficult to do accurately. But it is possible to look at a company’s valuation and see whether it looks attractive. So, for example, if I added Boohoo to my portfolio right now, even if it fell further, would I have grounds for optimism that over time it might recover?
That’s where I get excited about the Boohoo story. The retailer’s interim results may have contained unwelcome news on margins, but in the context of a creaking global supply chain and company-specific criticism of its labour practices, I don’t think that was really a surprise. Meanwhile, revenues up by a fifth showed that the retailer’s formula continues to work its magic with shoppers. Not only do I see further growth potential in Boohoo’s home market, I also think that Boohoo’s growing ambition for the US market could turn out to be a massive money-spinner.
After the share price fall over the past year, Boohoo shares are trading on a price-to-earnings ratio of 23.
Last year’s earnings per share had almost doubled compared to just two years previously. That makes the forward-looking valuation attractive to me. But crucially it also gives some grounds to expect the company can turn its booming revenues into higher profits, even if margins slide slightly. On that basis, I would consider adding Boohoo to my portfolio at the current price.
Risks and rewards
A falling share price can signal business problems, though, and I think it’s important to be clear-eyed about the risks with Boohoo. It has been working to improve its supply chain reputation, but its low prices likely mean it will continue to be dogged by accusations of using cheap manpower. Fashion retailers can also see revenues fall quickly if they don’t accurately predict trends. Continued negative investor sentiment could also limit any Boohoo share price rises.
But with its strong business story and good outlook, I think Boohoo may have started its recovery. I’d consider adding it to my holdings at the current price.
Christopher Ruane has no position in any shared mentioned. The Motley Fool UK owns shares of and has recommended Next. 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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