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Will inflation tear a hole in Boohoo’s share price?

Boohoo’s [BOO.L] share price had brought a tidy return for investors. Over the past month, the fast fashion online retailer’s stock is up just over 11%. News of Ken Griffin’s Citadel taking a 5% stake in Boohoo can’t have hurt. Yet, as inflationary pressures hit shoppers’ wallets, the continued price bonanza isn’t guaranteed.

What’s happening with Boohoo’s share price?

Boohoo’s share price jumped at the end of July on news that hedge fund Citadel had taken a 5% stake in the fast fashion company. The hedge fund founded by CEO Ken Griffin has emerged as the fifth biggest backer of Boohoo.

A shake up at the corporate level has also helped bolster sentiment with Shaun McCabe, CEO of train ticket retailer Trainline, joining Boohoo. McCabe has held similar positions at Asos [ASC.L] and Amazon [AMZN] Europe, and is already a member of Boohoo’s non-executive board.

Citadel’s backing and fresh blood at the top helped reverse what had been a volatile summer for Boohoo’s share price. At the beginning of June, Boohoo’s stock slumped after first quarter results revealed an 8% drop in revenue.

Boohoo pinned this on lockdown restrictions the previous year making year-on-year comparisons difficult. It also pointed to the fact that revenues were up 75% over the pre-pandemic period. International performance was impacted by increased delivery times, with revenue from the US down around 26%..

Full-year results were similarly disappointing showing that pre-tax profits for the 12 months to the end of February had fallen 94% to £7.8m from £124.7m the previous year. Factors hurting profits include rising distribution costs and lower customer demand following the removal of lockdown restrictions.

Returns are a problem for Boohoo’s share price

Despite Boohoo’s decent performance over the past month, the stock dropped 4.7% on Friday 5 August as the markets digested news that the Bank of England expects the UK to enter a recession and inflation could hit 13%. To combat rising inflation the central bank upped interest rates by 0.5% to 1.75%, making the cost of borrowing more expensive. This underlines the fact that people will have to start prioritising where they spend their money - something is already being seen in the amount of returns Boohoo is getting.

In its first quarter, Boohoo said that net sales have been affected by people returning orders. Returns are a problem as they need to be manually dealt with and the returned clothes are often sold at a discount. Had returns not been factored in, Boohoo could have made a first quarter sales growth of 9%.

As a deterrent, Boohoo scrapped its policy of free returns and since 4 July has been charging customers £1.99 to return items. The charge is taken off the refund for unwanted goods. Boohoo said that the move was due to rising shipping costs.

Rival Asos warned last month that it had seen a “significant increase” in customers returning clothes, blaming inflation for the rising number of items being sent back.

 

Where next for Boohoo?

Boohoo’s share price was untroubled by news of an investigation from the competition regulator into the dubious marketing of its products as ‘eco-friendly’. The investigation by the UK Competition and Markets Authority (CMA) will look at whether Boohoo, Asos and George at Asda are misleading shoppers by exaggerating the environmental claims of their products.

But the stock is vulnerable to the doom and gloom around the UK economy right now and what it means for people’s disposable income. Earlier in the summer Asos lowered its pre-tax profit guidance to between £20m and £60m, a steep drop from the previous £110m to £140m guidance.

Boohoo expects revenue growth to be in the low-single digits for the full year, with revenue growth expected to return in the second quarter of the year. Any revision downwards is likely to put pressure on the share price.

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