Up 57% in a day! Is Boohoo now a no-brainer value stock at 18p?
Boohoo Group (LSE:DEBS) skyrocketed 57% yesterday (27 November), suggesting lots of investors suddenly spotted value in this bombed-out stock. Yet despite this mighty jump, long-term shareholders are still sitting on massive losses.
I’m currently in the market for a UK turnaround stock. So, should I buy Boohoo at 18p?
Marketplace model starting to bear fruit
Yesterday’s share price jump was the biggest since 2020. Back then, the online fashion retailer was enjoying a surge in sales during Covid lockdowns. Then, as the pandemic eased, it was hit with soaring inflation, a cost-of-living crisis, and intense competition from Shein and reopened physical stores.
Consequently, Boohoo’s wafer-thin operating margins and low pricing power were brutally exposed, tipping the firm into the red. The share price collapsed and has been going down ever since.
But a half-year report yesterday suggested a turnaround is under way, with profitability (on an adjusted EBITDA basis) returning across all of its brands. Progress is being driven by the group’s pivot to a capital-light marketplace model, which allows third-party brands to sell products on its apps in exchange for a cut.
As such, total revenue fell 23% to £297m, but the statutory post-tax loss for continuing operations reduced significantly, from £126.7m to £3.4m. Meanwhile, net debt was down to £111m from £143m.
Debenhams was the standout performer, with gross merchandise volume (GMV) rising 20% to £318.8m. And management says it has line of sight to Debenhams delivering £1bn GMV and EBITDA of at least £50m inside three years.
Other brands like MAN, PrettyLittleThing and Karen Millen aren’t doing as well as Debenhams. But these are also now fully marketplace-enabled, putting the “foundations in place for their next phase of growth“.
Meanwhile, the brands have joined the online marketplaces of Macy’s and Nordstrom. They have over 46.5m social media followers.
This is a multi-year journey, and we have a clear plan and the right model in place. We are transforming into a lean, tech-enabled, best in class online platform business. CEO Dan Finley.
Somewhat confusingly, the group operates as Debenhams, though the stock still trades as Boohoo. But it intends to formally change the name of Boohoo Group to Debenhams, if shareholders approve. Though a new management bonus plan apparently doesn’t need approval.
Should I buy Boohoo stock?
I’ve been very bearish on the stock for many years now. And intense competition from larger fashion marketplaces like Shein, Next, and Amazon still worries me.
Yet the capital-light marketplace model that’s emerging does seem promising. The company says the fixed cost base will soon be reduced to around £100m, down from £292m in February 2024.
With losses shrinking, and management embarking on investor roadshows to explain the new strategy, money might start flowing into the stock again.
As such, the shares might prove to be undervalued at 18p. The forward price-to-sales ratio here is still just 0.17.
What new-ish CEO Dan Finley did at Debenhams was a minor miracle. If he can replicate that success elsewhere across the business, then the stock should recover well.
Personally though, I need more evidence that the turnaround is genuine. Boohoo is still loss-making overall, making this far from a no-brainer.
But I think this small-cap stock now at least deserves a place on investors’ watclists at 18p.
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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon. 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.
