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It’s been an impressive few weeks for stock performance boohoo (LSE: BOO). The retailer’s shares are up a third in 2023. They are moving close to 50p each as I write this on Tuesday.
Compared to where they were a few weeks ago, that’s good. But they’re still 45% below their price this time last year, and 74% lower over a five-year period. If they even recoup last year’s losses, boohoo stock could still be a bargain even after the recent rally.
So should I buy more to add to the ones I already have?
No nasty surprises
I would hardly say that the company has delivered much good news for investors so far this year. In a business update last month, boohoo revealed that revenue in the final four months of last year was down 11% compared to the same period last year. There were no bright spots: sales fell in all regions. The company forecast a year-over-year revenue decline of 12% over the full 12 months.
But while that may not sound great, the bad news was already pretty much expected. I think investors had long priced in the disappointing sales performance this year.
The company also planted some seeds of hope, referring to “recent positive signs in global supply chains”. They include fewer interruptions and cheaper shipping costs, which I think could positively contribute to boohoo’s profitability.
Improve investor confidence
So I think the recent rally in boohoo stock reflects more than anything a sense of relief among investors that corporate performance hasn’t been worse than they expected.
However, the absence of bad news is different from good news. I think it has helped drive the stock considerably. But I would be surprised if that alone was enough to continue to propel them towards the pound mark.
For that to happen, I think the company needs to show concrete progress. Improving profit margins could be part of that, and those improved supply chains can help in that regard. But many investors will also look to boohoo to prevent sales from shrinking, and indeed to grow back.
My opinion on boohoo stock
If that happens, I think the price could go back to a pound. They traded for over £4 each less than three years ago, so £1 a share is still a long way from past glories.
But clearly there is work to be done. Competition in fast fashion is intense and threatens profit margins. A reduction in inventory might be good for cash flow, but it can lead to less satisfied customers if it means orders take longer to fill.
In addition to managing its bottom line through strict cost control, boohoo would ideally return to top-line growth in an environment where many buyers are extremely cost-conscious. That’s possible: people need to wear clothes, and the company offers some very low-cost product lines. But boohoo’s recent sales trends aren’t encouraging.
I still keep my boohoo shares. However, I will not add more in the absence of more promising concrete signs that sales in the company are growing again.
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