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Earnings: why boohoo shares are still out of fashion today

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boohoo (LSE: BOO) shares are sliding today after the company delivered its Christmas trading update. That’s because the headline news wasn’t great. The online fast fashion retailer said group revenue declined 11% in the four months to the end of December.

This comes after the shares had rallied 30% over the last month leading up to the company’s update. Investors had likely bid up the stock in anticipation of some positive trading news. Now that none is forthcoming, the shares are going back down.

It’s been a miserable couple of years for boohoo shareholders. The growth stock is down a whopping 86% in just two years. Do boohoo shares now represent a potential bargain buy for my portfolio? Let’s explore.

Trading update

For the four months to December 31, the group revealed its turnover had fallen 11% to £637.7m from the same period last year (£714.5m). Sales declined in all regions. Management confirmed this means that revenue for the current financial year is expected to decline by 12%.

Four months to 31 December 2022

Revenue by region Financial year 2023 Financial year 2022 Change
UK £400m £451m -11%
Rest of Europe £73m £79.9m -8%
USA £128m £145.8m -12%
Rest of World £34.5m £37.8m -9%

Mounting problems

Worryingly, there was a 12% decline in sales year on year in the USA, once a major growth market for the firm. This suggests the group is probably losing market share to Chinese rival Shein, which was the most downloaded app in the US in the fashion and beauty app segment in 2022.

To be fair, most of the figures were in line with previous guidance. And adjusted EBITDA is expected to be in line with market expectations, with an adjusted margin of about 3.5%.

Overall, it just confirmed what most already knew — and what’s priced into the stock. That is, the company’s continuing to struggle on a number of fronts.

Chief among its problems is inflation. It’s a major headache as it increases input costs at the company, but also limits how much its young customers have to spend. And boohoo doesn’t have too much pricing power, mainly because fast fashion’s selling point is its cheapness.

After years of growth and increasing profits, boohoo is now seeing declining revenue and has swung to a loss. Investors probably aren’t particularly interested in such a combination.

Will I buy the stock?

One of the main concerns I have with fast fashion in general is its sustainability. The industry has a significant environmental impact. According to the UN Environment Programme (UNEP), fast fashion is the second-biggest consumer of water and is responsible for about 10% of global carbon emissions.

This impact has largely been overlooked by consumers until now. But I think there’s a possibility that younger consumers (boohoo’s core market) may judge such issues more harshly in future.

Of course, I may be wrong here. The immense popularity of Shein — the current king of global fast fashion — seems to indicate otherwise.

Overall though, I think there are too many risks attached to boohoo stock for me to buy the shares.

The post Earnings: why boohoo shares are still out of fashion today appeared first on The Motley Fool UK.

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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Boohoo Group Plc and Nike. 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.