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Retailer boohoo (LSE: BOO) built its reputation on offering a bargain. And with Frasers Group announcing today that it has increased its stake in the online fashion retailer, it apparently thinks the company itself — in the form of boohoo shares — is a bargain too.
Should I follow Frasers’ lead and add to my own boohoo holding?
Strategic or financial objectives
What is right for other investors is not necessarily right for me.
Specifically, in this context I see Frasers as a strategic — rather than a purely financial — investor.
The company has been on a buying spree in recent months, snapping up shares in retailers such as Next and ASOS as well as boohoo. Today’s announcement revealed that Frasers now holds a 7.8% stake in boohoo, up from 6.8% previously.
There could be strategic benefits to a firm like Frasers in such stake-building, from entering trading partnerships to increasing its own influence in the retail sector. But as a purely financial investor – on a small-scale – I may well not have similar strategic objectives to Frasers.
Whatever its objectives, Frasers has been spending heavily to buy boohoo shares.
The latter has seen its valuation plummet over time. The shares have lost four-fifths of their value over the past five years.
But that still gives it a market capitalisation of around half a billion pounds, valuing Frasers’ stake at just under £40m.
With that sort of price fall in recent years, could buying boohoo shares at their current price be a financial bargain, regardless of any strategic consideration an investor like Frasers may have?
I think the answer is yes and boohoo has wide brand recognition, significant infrastructure both in the UK and US markets and a sizeable customer base.
It has proved in the past that its model can be highly profitable. As recently as 2020-21, the firm reported post-tax profits of £93m.
Given its past performance and ongoing business potential though, why have boohoo shares lost so much value to the point they now sell for pennies each?
The company has a knack for attracting unflattering PR, from poor conditions in its supply chain to a revised executive compensation scheme. That could see its leadership handsomely rewarded even if the share price merely gets back to where it already was before things got worse on their watch.
Rivals like fast-growing global brand Shein threaten to lower profit margins across the industry. For a company with price as a key part of its proposition – such as boohoo – that could spell bad news for profit margins.
Meanwhile, the company’s own performance in recent years has slipped. Revenues slid 11% last year and the firm reported a hefty loss.
It is making some moves to right the ship. But it remains to be seen whether it can get back to historic profitability levels amid intense competition I think could be here to stay.
As a shareholder, the executive compensation scheme has also made me question whether the current management is really up to the job. For now, then, although I will continue to hold my stake, I will not be following Frasers’ lead in buying more boohoo shares.