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Should I buy or avoid Boohoo shares?

Rupert Hargreaves
·3-min read
3d illustration of many red arrows pointng on the left and a green one pointing on the right side of the image.
3d illustration of many red arrows pointng on the left and a green one pointing on the right side of the image.

Boohoo (LSE: BOO) shares have been among the best-performing investments to own on the London market over the past five years.

Since the beginning of 2016, the stock has jumped a staggering 660%. Over the same time frame, the FTSE All-Share returned just 16%, excluding dividends.

However, over the past year, when the firm should have been reaping the benefits of the pandemic, which has forced people away from brick-and-mortar shops to online, Boohoo has struggled. Concerns about labour abuses in its supply chain and corporate governance issues have weighed on the shares. The stock has returned just 10% since the beginning of 2020. By comparison, shares in peer Asos have gained 57%.

This underperformance suggests to me Boohoo shares could offer value. As such, I’ve decided to take a closer look at the business to establish if it’s worth adding to my portfolio.

Should I buy Boohoo shares?

Despite the issues the company has had to deal with over the past 12 months, Boohoo’s underlying business has thrived. The company’s latest trading update, which detailed sales growth for the 10 months to the end of December, announced overall revenue growth of 42% year-on-year. Total group revenue amounted to nearly £1.5bn, up from just over £1bn for the same period last year.

And it doesn’t look as if the firm is taking this growth for granted. It’s been on an acquisition spree with cash flowing into the group’s coffers. Boohoo has been snapping up other brands that have been unable to survive in the pandemic. In its latest deals, the firm has paid £55m for the online business of Debenhams, and management is looking at making an offer for some of failed fashion group Arcadia’s brands.

I think these efforts will help support the group’s growth. They may also provide firepower for further deals. By leveraging its infrastructure and experience in e-commerce, I think these bargain-basement deals could yield substantial returns for Boohoo and its investors.

Multiple threats

Still, despite the opportunities the company has, Boohoo shares face multiple threats as well. As mentioned above, last year it was reprimanded for its labour practices in the UK. This isn’t the first time the business has come under pressure for this reason, which concerns me. Management is taking action on this front though, and changes are in the works.

I’m also incredibly aware that the retail industry is viciously competitive. Just because Boohoo has made a success of it during the past five years, does not mean it will continue to do so. After all, Arcadia was one of the most important retail groups globally at one point. Now it’s bankrupt.

Another risk I see here is the price of Boohoo shares. At current levels, the stock is trading at a forward price-to-earnings (P/E) multiple of 41. I think that’s about right considering the firm’s rapid growth rate. However, this valuation doesn’t leave much room for error. If growth stutters, the market may quickly re-think its opinion of the business.

Therefore, while I think Boohoo shares could have a bright outlook, I don’t think the shares are without risks. Both the pros and cons of owning this business need to be considered. On that basis, I’m not comfortable buying the stock at its current valuation and would rather wait for a pullback before buying into the growth story.

The post Should I buy or avoid Boohoo shares? appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended ASOS and 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 2021