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The Boohoo share price is falling. I’d follow Warren Buffett’s advice

Roland Head
Arrow descending on a graph portraying stock market crash

Shares in online fast-fashion retailer Boohoo Group (LSE: BOO) are falling. Since hitting an all-time high of 433p in mid-June, the Boohoo share price has fallen by more than 20%.

The latest slide has been triggered by weekend allegations in the Sunday Times that workers in Leicester making clothes for Boohoo may be paid as little as £3.50 per hour.

Do we need to be worried?

Boohoo’s business model is built around fast and frequent releases of new designs. The group depends on UK factories — mostly in Leicester — to provide this quick response. Shipping by container from factories in Asia would be too slow.

This story isn’t the first to suggest that some of Boohoo’s subcontractors may not be respecting workers’ rights. Last week, workers’ rights group Labour Behind the Label released a report making similar allegations.

In a response issued on Monday morning, Boohoo admitted that if the Sunday Times report is correct, it may have revealed “totally unacceptable” conditions at a factory producing Boohoo garments. I don’t know how accurate these reports will turn out to be. But this isn’t the first mud that’s been thrown at Boohoo over the last year.

Short-selling target

In May, the company was the subject of a short-selling (negative) report. This made various allegations, mostly of which related to the accounting treatment of Boohoo subsidiary PrettyLittleThing. PLT was previously owned by the chairman’s son.

Although I think the report made some valid points, I don’t think it contained a smoking gun. The market seemed to agree — the Boohoo share price didn’t move much at the time.

Boohoo share price bonus plan

More recently, the company has established a ‘Management Incentive Plan’ that will see founders Mahmud Kamani and Carol Kane each receive £50m stock payouts if the Boohoo share price hits 600p within three years.

Again, there’s nothing specifically wrong with this. But I’m not really keen on linking such a generous incentive plan solely to Boohoo’s share price performance. In my opinion, measures such as profit, free cash flow, and returns on investment are a better way to measure management quality.

BOO: a brilliant success story

Despite my reservations, I agree Boohoo has been an amazing success since its 2014 flotation on London’s AIM market. Profits have trebled since 2017 and the company has delivered continued strong growth.

However, the Boohoo share price has already risen by about 450% in four years. The stock now trades on 47 times 2020/21 forecast earnings. When a high valuation is combined with negative reports about a business, I start to get nervous

What would Warren Buffett do?

The criticisms being aimed at Boohoo remind me of something Warren Buffett said in 2003. In his annual letter to Berkshire Hathaway shareholders, Buffett warned that there’s “seldom just one cockroach in the kitchen.”

He said that when “managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes.”

I don’t know if there’s anything wrong at Boohoo. But I don’t feel confident investing in an expensive stock when I’m not sure if I can trust management.

For now, I plan to avoid Boohoo shares.

The post The Boohoo share price is falling. I’d follow Warren Buffett’s advice appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. 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.

Motley Fool UK 2020