Over the past year, the Boohoo (LSE:BOO) share price has lost two-thirds in value. It has opened on Friday down 4.9%, to trade just above 100p. News this week around another profit warning saw Boohoo shares slump to levels not seen since 2015. Although there is clearly a lot of negative momentum out there at the moment, we think that the stock is becoming undervalued.
What’s been happening
Yesterday we got a trading update from the business. It detailed that even though gross sales were up 28% on the quarter, the outlook was revised lower for the full-year. It said that this was due do ‘continued disruption to our international delivery proposition impacting international demand, and significant ongoing pandemic-related cost inflation’.
In terms of numbers, adjusted EBITDA margin for the year is expected to be 6% to 7%, compared to previous guidance of 9% to 9.5%.
Concern around supply chain issues and cost inflation are valid. If the business can’t get the products in stock, then it’s irrelevant how strong customer demand is. Given the ever evolving nature of fashion, not being able to get products to market in a timely manner is worrying.
Cost inflation is also an issue due to the target market. Boohoo is predominately focused around relatively cheap fast fashion clothes for the younger generation. Price increases are likely going to be off putting for this segment that are very cost conscious.
Are Boohoo shares undervalued?
Despite the bad news regarding the profit warning, we think that Boohoo shares have overreacted. Granted, this is the third time this year that the business have revised down its predictions. This happened back in May, and again in September. But these revisions are still showing good growth, during a period of uncertain economic activity.
For example, in the nine months to the end of November, group total net sales for the UK region are up 80% over a two year period. This is exceptional growth. Even with revisions lower, adjusted EBITDA for the year is expected between £117m to £139m.
The bottom line is that Boohoo is a growing and profitable company. The sector it operates in is also growing, with the added benefit that Boohoo doesn’t have physical stores. Costly overheads have plagued the high street during the pandemic. Boohoo is an online player that has a proven business model without actual shops.
One of the biggest reasons why we think the selloff has been overdone is due to the transitory nature of the issues. As the CEO commented, ‘the current headwinds are short term and we expect them to soften when pandemic related disruption begins to ease.’
In a couple of years time, I don’t see us facing the same supply chain or inflation issues as we do right now. Therefore, we think that the Boohoo share price should price higher than 100p when looking out over that time horizon.