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I’m always on the lookout for undervalued companies, especially ones where the share price decline seems to have gone too far and doesn’t seem to reflect the fundamentals. The boom (LSE:BOO) the share price is currently worth less than one-fifth of what it was last September, should I add this company to my portfolio?
boohoo is a fast fashion online retailer that has grown rapidly since its stock market debut in 2014. Its 13 brands include PrettyLittleThing, Unpleasant Gal and MissPapwhich is loved by its Gen Z and millennial customer base.
Annual sales increased by an average of 56% from 2017 to 2021, with pre-tax profits rising from £31m to £125m over the same period. The company even thrived during the Covid pandemic. And yet, despite this track record of profitability, boohoo has never paid a dividend.
However, since 2021, things have gone wrong.
Sales growth slowed to 14% in 2022 and pre-tax profits fell to £8m. More worryingly, net cash was £276m in February 2021, but only £1.3m a year later.
The company blamed £60m on “pandemic delivery cost headwinds” (that’s inflation to you and me) and £35m on other exceptional acquisition-related costs.
What about the rest?
But boohoo isn’t the only fast fashion business struggling in the face of shrinking disposable income and rising costs.
ASOS (“serving all the moments of 20-something life”) does exactly what boohoo does, and its share price has fallen 79% in the past year.
this week Associated British Foods issued a profit warning for Primark (“loved by fashionistas and value seekers”) and when Error (“Shopping is a right, not a luxury”) went into administration earlier this year, it was saved The Fraser Group in a £20m deal.
Slowing down fast fashion
So there are clear warning signs that fast fashion is going out of, uh, fashion.
Industry is getting bad press for its approach to disposable clothing, and there are increasing calls for consumers to boycott these retailers.
The last series ITV‘s Island of love ditches I saw it first (“The best general store for the stylish generation”) as the main sponsor and went with eBay instead. The initiative to encourage more clothing recycling could appeal to a generation of younger shoppers who are easily influenced by their social media idols.
Time to wipe away those tears?
Long-suffering shareholders got a glimmer of hope in July this year when it was announced that US hedge fund Citadel had acquired a 5% stake in boohoo. The share price rose to 60p on the news, but has since gone quiet, with shares falling to around 43p.
Here’s the plan
So am I going to dip my toe into the market and buy some boohoo shares?
The answer is negative. I feel there is too much downside risk to boohoo’s share price and the fast fashion industry as a whole.
Also, the lack of dividends makes me want to cry.