Structural and cyclical change
One of the biggest problems we face as investors is distinguishing between cyclical and structural changes. A company may do well simply because the market moves in its direction, but then it will reverse at some point. Or maybe there is a real and significant change in the world and is the company riding that wave?
My assertion about Boohoo (OTC:BHHOF) (OTCPK:BHOOY) has long been that it is a structural change in the market. But one subject to a certain set of cyclical factors. So if we can buy when the cycle is against, we can take advantage of this structural change.
OK, well, that’s harder than just writing it like that.
We all know that online retail is eating up the shopping world. I know the UK numbers better than the US numbers, but e-commerce has accounted for 1-2% of the total retail market per year for at least the last decade. Obviously the lockdown and COVID has accelerated this (from around 15% to 27%) and this jump is rolling back. But it doesn’t go back to what it was.
It is also true that some markets are more conducive to such food than others. Amazon started with books because it was an obvious product. CDs followed and we can all think of markets that moved almost entirely online. We can also think of those who try hard but may or may not work – mattresses are my favorite example there.
It was long thought that fashion would not work online. Partly because a sizable group of fashion shoppers – albeit absurdly – believe that shopping is a social experience rather than a chore (did you notice I’m male?). Boohoo and others are clear proof that this was not true.
By avoiding expensive outlets, as well as the costs associated with stocking them, various online retailers have been able to take this youth fast fashion market by storm. As an economist (I’m not really, more of an economics writer), in hindsight, this shouldn’t come as a big surprise. Clothing is, for young people (i.e. those in the mating game) a form of social display and it is an extremely powerful human force. So give youngsters a cheap way to do what humans have been doing since clothes were invented and you might just be a winner.
I think the structural change in online fast fashion is here to stay.
Of course, sole proprietorships can fail
The above is not exactly new analysis and many people have tried to break into this market. What I like about Boohoo is that they seem to get it right.
Good, OK, fine except that there were cyclical problems. What I’ve written here over the years. In 2020, Boohoo came under attack over its contractors possibly using labor paid less than minimum wage. This caused a slump in the stock price which I said buy. I also called taking profit correctly. There was another round of speculation in the press that I said buy. Which worked again.
Simply put, there is a series of cyclical shifts in Boohoo price that mask what I believe is the ongoing structural change in the market as a whole.
Boohoo has had significant issues over the past year. Returns have increased. There were delivery issues to US customers (without a US warehouse this was a problem). There has been a drop in online sales as physical stores reopen. Myself, I think these are all cyclical issues that mask the underlying strength of the business.
The latest information release
Boohoo has made a trading update to the London Stock Exchange. The detailed message is simply that year-end results will be close to market expectations. That’s down from expectations a few months ago, but better than perhaps the market was expecting. Because the shares rose 20% following this press release.
I realize this is a bit sketchy, but my analysis is a matter of sentiment here. I agree, there have been cyclical issues for Boohoo, as there have been before. I think those are in the past. Therefore, the structural factor of being a market leader as the youth market continues to seek out fast fashion online will, I believe, come back to be the price driver for Boohoo.
Anyway, I think it’s another time to hop on the Boohoo train.
The investor’s point of view
I agree, it’s sketchy. This is much more of a belief than a detailed analysis of the markets under discussion etc. And yet, this belief in underlying strength sometimes clouded by cyclical factors has worked twice so far.
My recommendation for a long time is a modest amount of Boohoo. The next major news item is the annual accounts for May 4, when we will no doubt also have an update on trading for this period.