Boohoo‘s (LSE: BOO) stock came under attack in July. It was alleged that the company was sourcing its clothes from suppliers that treated their employees unfairly. Boohoo share price fell over 50%, from 405p to 198p over the following week.
After promising action and commissioning an independent report, Boohoo’s share price began to climb again. The results of the investigation were released at the end of last week, and Boohoo’s share price leaped by 15% from 324p to 375p.
So, it must have been good news then. Well, yes, and no. The report concluded that the allegations were accurate. It also said that the company did not deliberately allow poor conditions and low pay within its supply chain.
Investors seemed happy with the report’s findings and a commitment made by Boohoo to change its practices; otherwise, why would they have so eagerly bought up shares in the company?
Business is booming
I can understand the eagerness to buy shares in Boohoo. If an investor bought in 2014 and sold at the all-time high in June 2020, they would be up by over 800%. During this time, the company was delivering spectacular results, justifying Boohoo’s share price gains.
Boohoo is a fast-fashion retailer. Its marketing material indicates its customers want to wear today what celebrities had on yesterday, but don’t want to pay a high price. Boohoo has managed to give its customers and its shareholders what they want. Revenues increased from £195m in 2016 to £1,234m in 2020. At the same time, net income grew from £12m to £64m.
Shareholders would have been pleased to see earnings per share (EPS) marching ever higher. In 2016, Boohoo’s EPS was 1.06p. By 2020 it had grown to 5.38p. And the EPS ascent does not appear to be over. Analysts are forecasting 2021 EPS to come in at 7.42p, and another rise to 9.72p in 2022.
The investment case that led me to recommend Boohoo a year ago appears to still be in play then, at least according to those analyst estimates.
I’m not paying the Boohoo share price
However, I would not buy Boohoo shares at their current price. Boohoo’s business model requires low-cost and locally sourced manufacturing to meet its customer’s demands. Its customers appear to want on-trend clothing that goes out of style quickly.
Boohoo’s non-intentional use of UK factories paying workers below the minimum wage and subjecting them to unacceptable working conditions will stop. Boohoo is committed to making changes to its supply chain. However, a Financial Times investigative piece from 2018 highlights just how big a problem rogue manufacturing is in the UK.
There will be one-off and ongoing costs associated with this. Changing UK suppliers – to ones who treat workers fairly – will increase manufacturing costs for Boohoo. Moving manufacturing overseas to keep its cost low will lengthen its supply chain.
Doing the former will antagonize customers on the cost front. Doing the latter might make it challenging to remain a fast-fashion house. Either way, I think those EPS estimates might be overstated. Furthermore, will fast-fashion itself, which appears to be throwaway, be tolerated indefinitely? I am not so sure.
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James J. McCombie 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.
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