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Boohoo shares out of fashion ahead of earnings

The outlook for fast fashion brands isn’t pretty. Ahead of Boohoo’s preliminary earnings announcement on 4 May, analysts aren’t sure if the company can deliver good news, particularly after competitor Asos said that its profits had fallen by 87% year-over-year weeks earlier. But Boohoo is confident that the troubles it is experiencing are just temporary, and that once the effects of the pandemic fade away, it can bounce back.

Investors aren’t holding out too much hope for the UK’s fast fashion brands, with the Boohoo [BOO.L] share price floundering ahead of its preliminary earnings announcement on 4 May.

Since the start of the year, Boohoo’s share price has fallen almost 35% to the close on 28 April, with 14.1% shaved off the share price since 12 April alone.

This downward slide comes in the wake of rival Asos [ASC.L] reporting a sharp decline in profits in the six months to 28 February. While sales were up a modest 4%, Asos also reported that its profits had fallen by a whopping 87% year-over-year, due to supply chain issues and discounting to help shift stock that was going out of season.

Boohoo’s slump follows a positively received trading update that the company provided in March, which showed that sales for the year were set to come in up 14% year-over-year.

How have Boohoo shares been performing?

While Boohoo hopes to report decent full-year sales growth, its update also showed that growth appears to be slowing on a quarterly basis. In the fourth quarter, sales growth came in at 7% year-over-year, compared to the third quarter’s 10% and the second quarter’s 9%. This marked Boohoo’s slowest quarterly growth since it launched on the AIM, the London Stock Exchange’s market for smaller companies, in 2014.

This is a worrying sign, given that economies worldwide have been opening up again following Covid-19 lockdowns. If anything, customers should have more motivation to buy new outfits as they socialise and go out more.

Boohoo said its quarterly sales growth was “impacted by higher return rates” for its products, a trend which it predicted will continue for the first half of its 2022/23 financial year.

In December, Boohoo issued a profit warning — its second in four months. The company blamed this on “a spike in product return rates, disruption to international deliveries and higher inbound freight costs”, reported Reuters. At the time, the company was also concerned that return rates in January and February might be higher than normal if people couldn’t wear their outfits to planned parties, as cases of the omicron Covid-19 variant increased.

In February, The Sunday Times reported that Boohoo was engaging in a discounting spree, in order to shift as much stock as possible before the end of its financial year. However, other sources close to the company insisted that this was normal discounting activity for the time of year.

Can Boohoo restore its image?

In its March trading update, John Lyttle, CEO of Boohoo, said that the “pandemic-related headwinds” that the company has faced of late “are short-term in their nature”. He stated that the company’s current priority is to ensure that when these issues come to pass, the company will be “well positioned for growth”.

In January, Boohoo opened a new factory in Leicester — the city in which it became embroiled in a scandal around the treatment of workers sewing its garments in 2020.

Lyttle says the 23,000 square foot site has created 180 jobs for local people, and its ambition is for it to be perceived as a “centre of excellence” for UK garment production. Following a supply chain audit, Boohoo has also ceased ties with hundreds of factory partners that did not meet labour standards.

Boohoo is also having to deal with criticisms that its business model encourages overconsumption and throwaway culture among consumers, all while the planet faces an environmental crisis.

The EU is expected to soon launch an “Extended Producer Responsibility” scheme, which would see fast fashion brands pay a waste fee for each item they sell, in order to finance state textile reuse and recycling schemes. The details will be released next year, but could have a significant impact on the company’s bottom line.

According to MarketScreener, the 23 analysts covering Boohoo’s stock hold a consensus ‘outperform’ rating on the stock, with 10 recommending it as a ‘buy’. They also hold an average price target of 160.92p — a potential 99.8% upside on Boohoo’s share price as of 28 April.

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