The Boohoo Group (LSE: BOO) share price was up by 15% in early trading on Thursday after the fashion retailer said profits for last year should be in line with forecasts.
Boohoo’s share price has fallen by more than 70% over the last 12 months, as the company has repeatedly slashed its profit guidance. However, I think today’s update could be a turning point. In this piece I’ll explain why I may now buy Boohoo for my portfolio.
Getting back on track
Boohoo’s net sales (that is, its sales excluding returns) rose by 14% during the financial year ending 28 February. Adjusted profits before certain costs are expected to be in line with forecasts, at £125m.
Although this is a big drop from £174m last year, the key point for me is that Boohoo is delivering as expected. This suggests to me that the company is back in control of its operations and performance. That’s a good sign.
Of course, we’ve seen the Boohoo share price surge before over the last year, only for results to disappoint again. One key concern in my mind is that the company’s core youth brands might be overshadowed by newer rivals.
There’s still some risk here, but I feel more confident than I have before about Boohoo’s turnaround. Here’s why.
Following a master investor
Famed investor Jim Slater had some clear requirements for buying turnaround stocks. In my time as an investor, I’ve found them very useful. The good news is that I think Boohoo satisfies most of these requirements today.
In his book The Zulu Principle, Slater said that it was “absolutely essential” that forecasts for the year ahead show a return to profit growth. That’s true for Boohoo. Broker forecasts suggest earnings will rise by around 15% during the current year.
Another requirement is that a company’s sales should still be intact. That way, when profit margins recover, profits should rise quickly. This is also true for Boohoo. The group’s revenue is expected to have risen by 14% to £1,987m last year. That’s a new record.
Although profits fell last year because of higher costs in areas such as shipping and returns, I expect this situation to normalise. If Boohoo’s profit margins return to historic levels over the next couple of years, my sums suggest that profits could double.
Why I’d buy
I think this online fashion group still faces some challenges. But Boohoo’s UK sales are still rising, and the company said today that its rest-of-the-world business has now also returned to growth.
I’ve always been impressed with Boohoo’s ability to market and grow its brands, and I don’t see any reason why this should have changed. I’m also reassured by the presence of former Primark boss John Lyttle, who is Boohoo’s chief executive. I reckon Mr Lyttle should have the organisational skills needed to complement Boohoo’s creative flair.
The shares currently trade on around 13 times 2022/23 forecast earnings. If the company returns to growth as expected, I think the shares could look cheap at this level in a couple of years. I’d be happy to add some Boohoo stock to my portfolio today.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods and 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.
