Over the past year, a well-known penny share in the digital retail space has seen its share price collapse 74%. But the business has a track record of profitability and growing sales. I have been buying the share in recent months. Here I explain why.
Digital retailer
The share in question is Boohoo (LSE: BOO). The company has been in the headlines over the past several years for a number of reasons, including poor labour conditions at some of its suppliers’ factories.
But what a lot of investors seem to overlook is the fact that Boohoo has a very successful, established business. Negative headlines have damaged the brand’s reputation. But I think it can continue to grow despite that and recover its reputation over time.
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For the last year, Boohoo expects to report revenue growth of 14% compared to the prior 12-month period. It also reckons earnings before interest, tax, depreciation and amortisation (EBITDA) should come in at around £125m for the year. I do not like EBITDA as a measure because of the number potential costs it excludes. But in the prior year, the firm’s adjusted EBITDA was £174m. On that basis, the Boohoo business has seen a fairly sizeable earnings hit.
However, I think it is worth making a couple of points. 2020 adjusted EBITDA was £127m, so the most recent results only take the company back to roughly where it was a couple of years previously in terms of EBITDA. On top of that, it has been consistently profitable. 2021 saw post-tax profit of £93m. So while the recent problems may make it less profitable, I do not expect it to fall into the red and stay there. That matters because it could help the company to weather a storm without needing to raise new funds.
Boohoo share price risks
Despite that, many investors clearly do not share my confidence in the company’s outlook. The collapse in the Boohoo share price suggests they are concerned that the company was significantly overvalued before.
I recognise ongoing risks. One that concerns me is cost price inflation. From fabrics to transportation, growing costs eat into profit margins. As Boohoo operates in a low-cost segment of the market, it could be difficult to pass on higher costs to customers without losing some sales. The company has also seen its returns rate increase recently, which could add more costs.
Why I’m buying this British penny share
But I reckon such risks are already factored into the share price.
Inflation concerns me in the short term. But I do not see it as a problem that will hurt Boohoo forever. Its competitors are facing the same issue. So customers may simply have to accept that prices are bound to increase, whether they buy from Boohoo or a rival.
Meanwhile, the retailer has proved that it knows how to grow its business while turning a healthy profit. Its expanding footprint in the huge US market could help it keep growing. A price-to-earnings ratio of just 10 looks like good value to me for a growth stock like this. I see the current share price as a buying opportunity for my portfolio and have been increasing my holding in recent months.
