What’s going on with the Boohoo share price?

Businessman looking at a red arrow crashing through the floor

After interim results last week, investors have rapidly cooled on clothing retailer Boohoo (LSE: BOO). The Boohoo share price is now 43% lower than at this time last year.

Is this a buying opportunity for my portfolio? Here I consider some bull and bear arguments.

Boohoo share price: a bullish view

The company’s results statement sent a chill through the market and understandably so. Guidance on adjusted EBITDA margins was lowered. That reflected concerns including increased freight costs and wage inflation in the company’s distribution centres.

But the results contained a lot of positive news, too. First-half revenue grew 20% compared to the prior year period. Gross profit almost matched that increase, coming in 19% higher than last year.

One of the concerns that has plagued the Boohoo share price in recent months is how it pays people who make and distribute clothes for it. On that basis, the increase in wage costs at distribution centres may be seen in a positive light. It suggests that, whether through choice or the pressure of a tightening labour market, the company is improving wages in at least parts of its operations. That could help its reputation, a factor some fashion buyers may consider when shopping with a retailer.

Meanwhile, the revenue growth shows that the company’s winning formula continues to deliver. It has increased its warehousing and distribution, enabling further growth. The company has integrated and relaunched four new brands since the start of the year. These include the iconic Debenhams, which could help Boohoo reach a new audience. Looking further out, Boohoo also plans to open a new North American distribution centre in 2023, helping its continued international growth.

A bearish perspective on Boohoo

However, while revenue growth was impressive, that didn’t carry through to the earnings level.

Adjusted earnings before interest, tax, debt, and amortisation fell 5% in the period compared to last year. At the adjusted profit level, the weakening was even more pronounced, with the company recording a 20% decline. Net cash declined markedly, by almost a quarter of a billion pounds to £98m.

Growing revenues but falling earnings can suggest a business experiencing margin pressure. Indeed, Boohoo reported that its gross margin slipped slightly, from 55% to 54.6%. If wage pressure continues, and expands beyond the distribution network to the supply chain, that could continue to worsen in coming months and years. Shrinking margins can also suggest that the company has moved beyond its profitable core business and is now growing revenues less profitably. That is an alarm bell on potentially falling profitability.

My next move on the Boohoo share price

With Boohoo trading at a price-to-earnings ratio of 23, using last year’s earnings, it looks cheaper than it has for a while, though I still wouldn’t classify it as a bargain.

But I do like the company’s proven ability to grow revenues. Even though margins slipped slightly, they were still strong. If modest margin decline is the price to pay for the company bringing its labour practices in line with customer demand, I think that could be money well spent in terms of burnishing the brand’s appeal to customers. Boohoo looks relatively cheap to me. At the current Boohoo share price, I would consider adding the company to my portfolio.

The post What’s going on with the Boohoo share price? appeared first on The Motley Fool UK.

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More reading

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  • The Boohoo share price has crashed! What’s going on?
  • The Boohoo share price: opportunity or trap?

Christopher Ruane has no position in any 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.