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The boohoo share price is in pennies. Is it a steal?

Two women friends sightseeing in summer while on vacation.

As a shareholder in boohoo (LSE: BOO), the company’s name sums up my feelings about it. When I look at the boohoo share price today – down 84% in a year – I think “boohoo”!

But with shares in the online fashion retailer now selling for pennies, I think they are a steal for my portfolio. I see some risks but think there could also be rewards in future. Let me explain my take on both those aspects.

Risks to boohoo

First, I think it is helpful to recognise that there are real risks here. A share does not typically lose over four-fifths of its value in the space of 12 months for no reason.

Some of these are risks faced generally by many retailers right now. Cost inflation threatens to squeeze profit margins. The low prices at which boohoo sells many items gives it limited space to pass such price rises onto shoppers without hurting sales. A tightening consumer spending environment could lead to people buying clothes less frequently than before.

boohoo also faces risks of its own making. Its reputation among socially conscious shoppers is still recovering after poor labour standards at some of its suppliers were exposed several years ago. The company has taken moves to fix the problems, but bad smells linger.

Long-term growth prospects

But I think the investment case for boohoo is strong.

In the long term, I expect more and more people to buy clothes online. That means the size of the market should grow. boohoo has a strong position within that market. It has deep experience of sourcing, selling and distributing its wares. It also owns online brands including longstanding retailers like Debenhams, Warehouse and Karen Millen as well as its own boohoo range.

The economics of a business that sells many of its clothes at low prices can be challenging. But although it fell to a loss last year, in the prior 12 months, boohoo made a post-tax profit of £93m on sales of £1.7bn. That shows the business can be profitable and indeed it had been for many years until its recent loss.

Even though it fell into the red last year, annual sales growth was 14%. In its most recent trading update in June, revenue fell 8% in the first quarter. But boohoo maintained its guidance for the full year of revenue growth in the low single digits. I expect further sales growth in future.

My take on the boohoo share price

I see boohoo as a company that has significant strengths but it currently going through challenging times in its end market.

That may last several years, but as a believer in long-term investing, I have been happy to add boohoo shares to my portfolio this year in the hope of strong future performance.

The current market capitalisation of £517m is less than six times those 2021 earnings. The business may take time to recover, but I see the current boohoo share price as a steal for my portfolio.

The post The boohoo share price is in pennies. Is it a steal? appeared first on The Motley Fool UK.

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C Ruane has positions in boohoo group. 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.