Boohoo stock price is up 15% today, is it finally a buy?
the Boohoo Group (LSE:BOO) The share price rose 15% in early trading on Thursday after the fashion retailer said last year’s profits were expected to be in line with forecasts.
Boohoo’s share price has fallen more than 70% in the past 12 months as the company repeatedly cut its profit forecast. However, I think today’s update could be a turning point. In this article I will explain why I can now buy Boohoo for my wallet.
Get back on track
Boohoo’s net sales (meaning its sales excluding returns) increased 14% in the year ended February 28. Adjusted profit before certain costs is expected to be in line with guidance at £125m.
Although this is a steep drop from £174m last year, the key point for me is that Boohoo is delivering as expected. This suggests to me that the company has regained control of its operations and performance. It’s a good sign.
Sure, we’ve seen Boohoo’s share price soar before over the past year, but the results have again disappointed. A major concern in my mind is that the company’s main youth brands could be overshadowed by new rivals.
There is still some risk here, but I feel more confident than before about Boohoo’s turnaround. Here’s why.
Follow a master investor
Famed investor Jim Slater had clear requirements for buying turnaround stocks. In my time as an investor, I have found them very useful. The good news is that I think Boohoo meets most of these requirements today.
In his book The Zulu PrincipleSlater said it was “absolutely essential” that forecasts for the coming year show a return to earnings growth. This is true for Boohoo. Broker forecasts suggest that profits will increase by around 15% in the current year.
Another requirement is that a company’s sales must always be intact. This way, when profit margins recover, profits should increase quickly. This is also true for Boohoo. Group turnover is expected to have risen by 14% to £1,987m last year. It’s a new record.
Although profits fell last year due to higher costs in areas such as shipping and returns, I expect this to normalize. If Boohoo’s profit margins return to historic levels within the next two years, my calculations suggest profits could double.
Why would I buy
I think this online fashion group still faces challenges. But Boohoo’s sales in the UK continue to rise and the company said today that its business in the rest of the world has also returned to growth.
I’ve always been impressed with Boohoo’s ability to market and grow their brands, and I see no reason why that should have changed. I am also reassured by the presence of the former boss of Primark, John Lyttle, who is the managing director of Boohoo. I think Mr. Lyttle should have the organizational skills to complement Boohoo’s creative flair.
The shares are currently trading at around 13 times forecast earnings for 2022/23. If the company returns to expected growth, I think stocks could look cheap at this level in a few years. I would be happy to add Boohoo stocks to my portfolio today.
Roland Head has no position in any of the stocks mentioned. The Motley Fool UK recommended Associated British Foods and the boohoo group. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.