Boohoo [BOO] shares have fallen by two-thirds this year as investors bet that the youth-oriented online fashion retailer could struggle amid a deepening cost of living crisis.
But not all investors will be shedding a tear over the Boohoo share price’s tumble. The Manchester-based company is the UK’s most shorted stock, according to a recent article by Proactive Investors citing data supplied by Bowmore Asset Management. The data indicated that 215 major short positions have been taken out against Boohoo in the past year, putting it ahead of B&Q-owner Kingfisher and online fashion rival Asos. The latter’s share price has plummeted more than 73% this year. The FTSE 250, of which Asos is a constituent, is down by around a quarter over the same period.
A lockdown-era winner loses its lustre
Boohoo’s share price soared during the pandemic, exceeding 400p in mid-2020 as young consumers headed online to indulge in retail therapy during the pandemic. In the six months to the end of August 2020, which covered the period of the UK’s first national lockdown, Boohoo’s revenue soared 45% year-on-year to £816.5m, making the company one of the Covid-19 era’s economic winners.
However, the stock fell out of favour with investors as it struggled to maintain that level of growth. One year later, in the six months to August 2021, revenue growth had slowed to 20% year-on-year as vaccines facilitated a return to more normal shopping habits. Meanwhile, profits slumped amid higher costs. In the year to February 2022, profit before tax fell 94% year-on-year to £7.8m.
Now, as we await Wednesday’s announcement on the company’s results for the six months to the end of August 2022, what should traders and investors expect?
Tough times for retailers
This is a challenging period for almost all retailers. With inflation at 40-year highs, many consumers are prioritising spending on food and energy bills. Fashion outlets like Boohoo and Asos may find the going particularly tough as their target demographic of 16-30 year olds, many of whom have limited disposable incomes, cut spending on new clothes. Last weekend, The Times reported that Boohoo had cancelled orders with suppliers amid a slowdown in sales.
In Q1 – the three months to the end of May – revenue fell 8% year-on-year to £445.7m. At the same time, inflation pushed up Boohoo’s costs across the board, from factory bills to deliveries, squeezing margins. Gross margin narrowed to 52.8% from 55% a year earlier.
There is also a sense that young consumers and regulators may be turning against fast fashion – that is to say, clothes made from cheap, environmentally damaging materials such as non-organic cotton. Boohoo’s announcement this year that it is partnering with Kourtney Kardashian on a “sustainability journey” was met with much sarcasm and eye-rolling on social media. Meanwhile, the company is under investigation from the UK’s Competition and Markets Authority over accusations of “greenwashing” – in other words, for allegedly making exaggerated claims about the environmental sustainability of its products.
Can Boohoo weather the storm?
Despite the lacklustre Q1 results and the above-mentioned challenges, Boohoo’s Q1 update saw the company maintain its outlook for the year to February 2023. Full-year revenue growth is “expected be in the low single-digits”, with a return to growth in Q2 and improving growth rates in the second half of the year, according to the statement.
That forecast may prove a tough ask in a gloomy economy. Will it be revised? Investors are likely to watch this space closely when interim results are released at 7am on Wednesday 28 September.
Although challenges abound, it's not all doom and gloom. The company has a strong balance sheet and last year acquired brands such as Debenhams, Dorothy Perkins and Burton, diversifying its business model and perhaps broadening its appeal to customers of different age groups and income brackets. The retailer also reported capital expenditure of £261.5m last year as it sought to expand and automate its distribution network. The group plans to open a new distribution centre in Elizabethtown, in the US state of Pennsylvania, in mid-2023.
Equity analysts’ opinion on Boohoo appears divided. Of 24 analysts polled by the Financial Times in September, one gave Boohoo shares a ‘buy’ rating, eight rated them ‘outperform’, 12 considered them a ‘hold’, and three reckoned they would ‘underperform’. There were no ‘sell’ ratings.
Among the 21 analysts offering a 12-month price target on the stock, the median target was 75p, representing an 88.16% increase on Friday 23 September’s closing price of 39.86p.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.