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Why did the Boohoo share price fall over 20% last week?

A young woman sitting on a couch looking at a book in a quiet library space.

Despite a 13% rally on Friday, last week skimmed over 20% off the Boohoo (LSE: BOO) share price. The stock has struggled over the course of the year and investors have seen the share price of the online fashion retailer plummet 65%.

This raises the question: why have we seen such a downward trajectory in the Boohoo share price? And, more importantly, can it make a recovery from its poor form seen over the past year or so? Let’s take a look.

Boohoo earning report

The main reason for the latest fall was the release of the firm’s trading update. The central takeaway that hurt investor confidence was its guidance cut. The business blamed this on higher than expected returns rates, along with continuous delivery disruptions as Covid-19 continues to put a halt to normal proceedings. As such, management has adjusted full-year guidance. Safe to say, this did not sit well with shareholders.

What this translated to was a cut in total sales growth, with estimates now placed at 12%-14%. This was a large cut to the original 20%-25% guidance. Adjusted EBITDA margin guidance also saw a drop, of around 3%, to between 6% and 7%. For a potential investor like myself, this was not positive news.

However, and as my fellow Fool Zaven Boyrazian highlighted, there were some positive signs in the update. Most notably, the last nine months have seen double-digit sales growth, sitting at £1.48bn. That’s a 65% increase from the same period in 2019. The firm also said it continues to invest in its distribution network, with its first US distribution centre expected in 2023. That is important as fulfilling international orders from the UK dented global sales in the latest period. This investment demonstrates that, despite the short-term issues Boohoo may be facing, it certainly has long-term potential.

I’m still cautious

Yet I do have further concerns with Boohoo. One is competition, partly coming in the form of Chinese online fast-fashion retailer Shein. That business has experienced major growth recently, bringing in nearly $10bn of sales in 2020 – its eighth consecutive year of revenue growth above 100%. Forecast sales for the next year are just below the $15bn mark, showing the threat it poses to Boohoo. However, Boohoo is not alone in its struggles. And not all its competition is enjoying similar success to that of Shein. For example, ASOS has also suffered this year, with its share price down over 50% year to date.

Another concern for me is the reputational issues that continue to hang around. More specifically, accusations against suppliers paying workers below the minimum wage. This has massively dented Boohoo’s reputation — adversely impacting the share price.

My outlook

Boohoo’s return to its 410p high always looked to be an uphill battle, but it seems this latest update has rubbed salt in the wounds. While the update did offer glimmers of hope, the adjusted guidance reinforced the negative impacts Covid has had on businesses such as Boohoo. The 24% fall last week represents only a small part of what has been a poor year for the Boohoo share price. Although currently trading for 105p, I won’t be looking to buy Boohoo shares any time soon.

The post Why did the Boohoo share price fall over 20% last week? appeared first on The Motley Fool UK.

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Charlie Keough has no position in any of the shares 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.