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Investors in boohoo (LSE: BOO) (of which I include myself) continue to have a miserable time. Another set of disappointing results earlier this month led to its share price falling heavily again. It’s now down 19%, year to date.
Hedge funds and other professional traders continue to bet against the stock. It has consistently been in the top five most-shorted stocks all year.
Despite all the negative news, I see a few chinks of lights on the horizon.
Leaner and fitter
Since Covid, costs across the business have been on the rise. Return on investment (ROI), which measures the profitability of investments, has been low.
To tackle this problem, it has identified £125m of annualised cost savings over the next two years. This is split across three buckets.
The largest savings will come from costs associated with product pricing. Since 2019, apparel prices have risen by over 20% as a result of surging raw material costs.
As deflation kicks in, it’s seen cost pressures ease, particularly from falling energy and freight costs. What is encouraging is that it has decided to reinvest some of these savings and not bring it all to the bottom line. That tells me that management still has a growth mindset.
Automation of its Sheffield distribution centre is now complete. Since opening, pick rate has jumped seven times. I also expect it to provide significant labour cost savings over the coming years.
It’s also tightly controlling overhead costs. The business is undoubtedly a lot more agile than it was pre-Covid. This in part due to its much leaner approach to inventory stock management, which is down £94m year on year.
US growth opportunity
One of the reasons why I invested in boohoo was due to the untapped US market.
When supply chain disruption hit following Covid, this severely dampened its ability to service US customers. However, this is all set to change following the opening of its US distribution centre last month.
Prior to this opening, a customer in the UK was 1.6 times more likely than a US customer to complete their purchase. Driving improvements in this conversion rate provides it with a huge opportunity.
It’s very early days with its US distribution centre and only limited brands are available at the moment. However, with an average delivery time of three days, as well as next-day shipping to the whole of the East Coast, I can see real momentum beginning to develop.
Competition
Boohoo’s customers are predominantly millennials and Gen Z. They are both fashion-conscious and price-sensitive. But the fast-fashion industry is cut-throat and margins are thin.
A couple of years ago, Chinese brand Shein was not even on its radar. Today, it is gobbling up market share and likely heading for a multi-billion dollar listing in the US. Mike Ashley, the owner of Fraser’s Group has been buying in for some time and is now its largest shareholder. Maybe a takeover is on the cards.
Regardless, when economic recovery arrives, boohoo is well placed to take advantage. Its share price might have further to fall; but as an investor willing to accept a higher level of volatility, I view its depressed share price as a generational wealth opportunity.
