Clothes are not the only cheap thing about online retailer boohoo (LSE: BOO). A plummeting boohoo share price over the past couple of years has also seen the stock look either like a great bargain or an ongoing value trap, depending on one’s perspective.
The company issued its interim results this morning (3 October). What do they tell us about the state of the business — and the investment case for boohoo now?
Weak financial performance
boohoo said in the results that it had made “substantial progress“.
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I beg to differ, unless the phrase means progress in the wrong direction.
Revenue in the first six months fell 17% compared to the same period last year. The company slid to an adjusted loss before tax. Net debt rose from £10m at this point last year to £35m this time around.
None of that makes me think that the business is moving in the right direction.
Average selling prices fell year on year set against 8% price inflation during that period in the wider UK market. Arguably that makes boohoo more competitive. But I think it points to the bigger strategic challenge facing the firm. It is now competing against rivals like Shein with very low cost bases.
Increasingly there is a risk that boohoo could end up in a race to the bottom on price. I think that is already showing through in the company’s negative profit margin.
But I fear things could get worse from here. That could push the boohoo share price even lower.
More bad news ahead?
Despite its positive tone, the results also stated that volume recovery was slower than previously anticipated. As revenues fell sharply, I would not be talking about volume recovery at all if I was the chief executive but simply stopping the bleeding. On the basis of that slower than anticipated speed, the company now expects full-year revenues to decline in the range of 12% to 17%.
Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) are expected to be £58m-£70m. But the firm was silent on post-tax profit. I fear the company will be loss-making at the full-year level.
Possible grounds for optimism
Set against that, the company has launched a new distribution centre in the US. That could help drive sales growth there. It continues to have a substantial customer base and has identified numerous possible cost savings.
The report said that the board’s confidence in rebuilding profitability over the medium term remains “unchanged“.
That sounds arrogant if not delusional to me in light of the woeful performance of the business in the first half on top of a weak showing last year. I think there is a lot of work to be done to turn around boohoo. So far the results are not pointing clearly in the right direction.
Damaged investment case
In fact, I think ongoing weak performance could push the boohoo share price down yet further even after its 88% fall in five years.
The shares opened down around 8% in morning trading after the results were released.
I still believe boohoo has great long-term potential as a business but am getting an increasingly sinking feeling about its turnaround efforts. For now I will hold my shares but if things do not start to show more promise soon I will consider selling them.
