As a committed value investor, Boohoo (LSE: BOO) represents my first and, to date, only foray into growth stocks. Since buying the stock a few months ago, I have seen the value of my investment plunge, which is never a great feeling for any investor. My dilemma is whether its crashing share price represent a good opportunity to double down or a falling knife with still a long way to drop?
A broken business model?
Boohoo’s innovative value-driven business model has certainly taken the fashion world by storm. Its approach of manufacturing small quantities of a wide range of clothes and scaling production for those that sell well, has been a hit. With fashion constantly changing, the company has profited handsomely from image-conscious teenagers and millennials. The company’s ‘test and repeat’ model has also enabled it to minimise financial losses on products that, for whatever reason, don’t sell.
But then problems emerged. It began with the findings of a report commissioned by the company that concluded Boohoo knew of poor working practices in its supply chain long before the scandal hit the headlines. This was followed by the class action lawsuit in the US accusing it of misleading promotions in California.
Pressure continued to mount on the firm when it issued a profit warning in December citing rising supply chain inflation, high returns and air freight restrictions leading to 10-day delivery times to the US, a key growth region.
It is this last issue that has caused most concern for me. The company believes the problems are primarily related to the pandemic and therefore “transitory in nature”. I am not so sure. Its entire value proposition, popularised in the words ‘fast fashion’, is based on price. With inflation beginning to really take hold in the economy, it is likely that discretionary spending could fall.
Yet while short-to-medium-term headwinds will stunt Boohoo’s growth, I maintain that the prospects for the company on a longer-term horizon remain favourable. As its US distribution centre comes online in 2023, that should help improve sales in that fast-growing market. However, that may take some time to materialise, as there will be a clear need to invest in marketing to make up lost ground.
I am also pretty excited about its growth potential from the brands it acquired out of administration last year. The standout purchase was Debenhams. Here, it wants to transform a leading fashion and beauty retailer into a digital department store and marketplace through a new capital-light and low-risk operating model. The company has already began working on the digital platform that will support this acquisition. If it can execute on its strategy here, then I see huge potential for future growth.
Buy, sell or hold?
The short-term fate of Boohoo will very much depend on its trading update next week. If returns remain stubbornly high or it has failed to meet its revised sales growth targets from December, then I expect the share price to fall significantly. Either way, given the uncertainty in the pace of economic recovery together with rising inflation, I expect the share price to remain under pressure for some time. Therefore, for now, I am in no rush to buy more but I will not sell either. I am holding.
Andrew Mackie own shares in Boohoo. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.