Is time running out to buy boohoo shares below 50p?

Pandemic-related factors affecting shipping costs and labor market conditions are considered boohoo (LSE:BOO) shares over the past 12 months, resulting in a 46% plunge. However, the company’s share price has seen a change so far in 2023.

At the start of the year, fashion shares changed hands at 37p. As I write, it’s above 48p – that’s an impressive 31.5% gain this year to date.

So, can the rally continue, or will the share price remain anchored below 50p? Here I am.

Back in fashion?

One of the catalysts for the bounce in boohoo’s stock price was a recent upgrade by analysts at Bank of America.

Raising its target to 75p per share, the bank now gives the company a ‘buy’ rating after praise for its cost-saving measures. Analysts also highlighted signs that some headwinds are easing, including supply chain disruptions as well as rising energy and raw material costs.

A new trading statement revealed that boohoo’s tight inventory control – evidenced by a 27% reduction – has helped the generation of cash. The company has gross cash of more than £300m at the end of 2022, which bodes well for its balance sheet repair efforts.

What’s more, boohoo expects net debt to fall to £50.4m by the end of February, equivalent to less than 1x adjusted EBITDA. This puts the business in a better position than debt FTSE 250– registered competitors ASOSwho have instructed debt restructuring companies to work with creditors.

The numbers are encouraging enough to make Bank of America turn bullish on retailers. However, I was a bit hesitant. There are also indications of weakness in the results.

A potential value trap

For the four months to December 31, boohoo’s UK profits were down 11% year-on-year and international profits were also down 10%. This time captures the momentous celebration. Tumbling profits in all areas do not show much to be thankful for.

While Bank of America highlighted the improving macro environment, I think other factors could continue to affect the retailer’s performance.

The Royal Mail strike was more anticipated due to the ongoing dispute involving postal workers and their employers, International Distribution Services. Worries about delivery delays can deter consumers from buying at online retailers like boohoo.

In addition, the company’s pricing power is under increasing pressure. The emergence of Chinese brand SHEIN has changed the competitive landscape of the fast fashion industry. The innovative points system of overseas companies and the use of big data tools are the main threats to boohoo’s business.

I’m also skeptical that cost-saving measures alone will turn around the group’s fortunes. There are only so many efficiency savings that can be made before they start to affect the quality of service a company offers.

Should I buy boohoo shares?

boohoo shares could rise above 50p and stay there, especially if debt reduction plans give investors confidence. However, there are some serious risks that cloud-based companies face.

I see fast-fashion retailers as a high risk/reward play. Now, I think there are better investment opportunities in the stock market and I will not buy the stock now.

However, I will closely monitor the company’s performance and keep it on my watch list.