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A year ago, I thought there was value to be had buying shares in online retailer boohoo (LSE: BOO). I waited to buy and the shares fell. At that point I moved in and started adding them to my portfolio. The boohoo share price has continued to decline and now sits 77% below where it was a year ago.
Have I made a mistake – and should I cut my losses by selling?
I do not think I have made a mistake.
The investment case I considered when I bought into boohoo was that I expect robust and, hopefully, growing demand for online fashion. boohoo could benefit from this thanks to its brands, existing customer base and established logistics networks.
All of that still stands, in my view. Revenues in the first half of this year did fall by 10% compared to the same period last year. But I see that as a temporary decline, partly caused by consumers cutting back on discretionary spending as the economy worsens.
What concerns me more is the long-term profitability outlook for the firm. It had been consistently profitable up to 2021, when it made £93m in profits after tax. But last year it fell to a post-tax loss of £4m. With cost inflation eating badly into margins at the retailer, whether this is also a bump in the road or a long-term challenge could affect the boohoo share price significantly.
Tumbling share price
I think the dramatic fall in the company valuation over the past year suggests many investors are worried that the retailer will struggle to get anywhere near its old profit margins again in future. So they are putting a smaller price tag on the company.
My own view is that people will want and need to keep buying clothes, and in a recession, boohoo’s competitively priced offering could actually help it attract new customers. Fixing the imbalance between costs and selling prices in a world of sharp inflation is not a problem specific to boohoo.
We have seen similar challenges lately at rivals like ASOS. I think boohoo’s retail experience and supply chain expertise mean that in the end it should be able to right the ship. It may take several years, but I expect boohoo to start growing sales and improving profit margins again. That could help boost its share price.
Investing for the long term
I do not know when that will happen and it could be a rocky road ahead for shareholders like myself.
But as a believer in long-term investing, I am willing to wait. If my investment case turns out to be correct, I think the boohoo share price can recover over time. That is why I continue to hold my shares.