Boohoo’s share price has tanked. Here’s the move I’ve made

Edward Sheldon, CFA
Businessman pulling out wooden brick from toppling stack

Online fast-fashion retailer Boohoo (LSE: BOO) has seen its share price take an absolute battering this week. After ending last week near the 390p mark, the stock closed yesterday at 225p. That represents a retracement of more than 40%.

Is this an opportunity to get onboard one of the fastest-growing companies on the London Stock Exchange at a great price? Or is it game-over for the Boohoo growth story? Let’s take a look at what’s caused the share price to fall.

Boohoo share price: why has it fallen?

The reason Boohoo’s share price has plummeted this week is that, over the weekend, The Sunday Times published an article highlighting shocking working conditions at Jaswal Fashions – a clothing factory in Leicester linked to Boohoo. The newspaper claimed that workers at the factory were being paid just £3.50 an hour. It also said that there were few measures in place to protect workers against Covid-19.

In response, Boohoo came out on Monday and said that the conditions highlighted by the newspaper were totally unacceptable and fall “woefully short” of any standards acceptable in any workplace.

It also said its early investigations into the matter had revealed Jaswal Fashions isn’t a declared supplier. The firm added it was taking immediate action to thoroughly investigate how its garments had ended up in the hands of Jaswal Fashions. And it said it would urgently review its relationship with any suppliers that had subcontracted work to the manufacturer.

Then, yesterday, the company said it would launch an immediate independent review of its supply chain. It added that it would make an initial commitment to invest £10m to eradicate supply chain malpractice.

What now?

This development is a big blow for Boohoo. The working conditions highlighted by The Sunday Times are, without a doubt, totally unacceptable. In the short term, sentiment towards the company is going to take a hit. Already, ASOS, Next and Zalando have dropped Boohoo’s clothes from their websites. I wouldn’t be surprised if some ‘influencers’ boycott the brand too.

However, in my view, the problems here are not insurmountable. Boohoo has made it very clear it won’t tolerate such working conditions, and that it’s absolutely committed to raising standards. Meanwhile, any reputational damage is likely to be largely confined to the Boohoo brand. In my view, it’s unlikely to impact the group’s other brands (PrettyLittleThing, Nasty Gal, etc.) too badly.

So I’m not willing to write off the growth story just yet. I could be wrong, but this strikes me as more of a short-term hiccup (which young growth companies often experience) rather than a terminal issue.

Boohoo shares: I’ve just bought more

All things considered, I see Boohoo’s share price pullback as a buying opportunity. And, on Monday, when the stock was down about 20% for the day, I added to my holding (I was a little early with my purchase in hindsight!).

I expect Boohoo shares to be highly volatile in the short term. Boohoo’s share price is volatile at the best of times. After this development, volatility is likely to be elevated.

However, in the long run, I expect the stock to continue rising due to the fact that Boohoo’s brands are extremely popular.

The post Boohoo’s share price has tanked. Here’s the move I’ve made appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Boohoo Group and ASOS. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK owns shares of Next. 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.

Motley Fool UK 2020