Boohoo Group is reporting certain operational business problems and therefore lower expected profits. We covered the Boohoo trading statement yesterday.
The concerns are varied and there’s no one overriding issue that stands alone. There’s a lack of a US warehouse – something that can be solved – that delays delivery in that market. There’s an always likely step back from online shopping as bricks and mortar retail reopens. There are, after all, odd as it may sound, those who regard shopping as a social activity.
It’s even possible that the bloom is simply coming off Boohoo. Fashion is a fickle world after all.
However, in at least two past episodes drops in the Boohoo share price have been excellent buying opportunities. The first time around was in June 2020, after allegations concerning less than minimum wages being paid in Leicester subcontractors. The stock dropped and then rose again as the market realised that while all of that is terribly naughty, if true, the customer base seemed not to care one whit. They kept buying the gear. The stock has pretty much recovered by Sept 2020.
Then there was a repeat of the allegations over less than minimum wage in Oct 2020, the Boohoo share price dropped again, buying in at that point captured the rise as – you guessed it, the consumers seemed to care not that one whit.
The important question now is whether this is going to happen a third time. Are we seeing just a slump in the share price that will recover? Therefore, buy the dip?
Past experience is useful when considering share prices but what really matters is the future. It’s possible to think of this either way around.
Those two earlier dips were caused not by anything inside the business itself at Boohoo. Well, to the extent that minimum wages are inside perhaps, but the story didn’t affect internal workings, sales nor margins. It was all entirely, both times, about how outsiders, other shareholders, might view the revelations. It was an external to Boohoo’s business reason for the share price drop that is, so something that could bounce back once external opinions changed, if they did. Once it became clear that the customer base didn’t care and kept on buying then that opinion did change. Buying the dip worked.
On the other hand, the reason for the Boohoo share price slump today is workings internal to the business. Stock issues, time to delivery, changes in fashionable tastes perhaps. As there’s a different cause we might gain a different ending. Buying the boohoo share slump isn’t a given profitable trade, it’s one that comes with risk.
If Boohoo can solve these logistics problems then we might expect to see a bounce in the share price. But it is different from the last two dips and buy opportunities so the outcome is unknown.
Boohoo shares are traded on the London stock exchange's AIM market (the alternative investment market), which is the submarket specifically for smaller companies. AIM stocks are attractive to investors as they have tax advantages and smaller companies have the potential to benefit from rapid growth. But are Boohoo shares the best buy? Our stock market analysts regularly review the market and share their picks for high growth companies
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Tim Worstall is a freelance writer specialising in economics and the financial markets.