The Boohoo (LSE: BOO) share price has been extremely volatile these past few months. Back in July, the share price fell nearly 50% after reports of poor standards in its Leicester factories. Even so, thanks to extremely strong and rising profits, the share price was able to recover to nearly 400p. But unfortunately for the online clothing company, the problems over poor working standards remain. This meant news that PwC is standing down as its auditor led to the company losing a fifth of its value in a single day. Does this therefore offer a perfect time for investors to buy its shares, or has it got further to fall?
What caused the drop in the Boohoo share price?
The fundamental reason for the 20% drop was the news that PwC was going to quit. This has led to a number of different concerns. Firstly, it is clear that PwC does not want to be associated with Boohoo. This is due to the number of different issues surrounding the company, including both weak corporate governance and a failure to ensure good working conditions in factories its uses. In fact, the recent Levitt inquiry revealed excessive hours, life-threatening conditions and illegally low pay in its supply chain. As such, the damage to the firm’s reputation seems warranted. This means that it’s also not a surprise that the Boohoo share price has fallen considerably.
A further issue that the recent news presents is that the fashion giant could struggle to find replacement auditors with sufficient size and expertise. For example, four of Britain’s biggest auditors have already ruled out working for the firm. A lack of potential options could therefore lead to trouble for Boohoo.
It’s not all negative
While this negative news sent the Boohoo share price downwards, the worries do not seem to be reflected in profits. In fact, in the six months to 31 August, pre-tax profits rose 51% to £68.1m. Revenues were also able to rise by 44% and this reflected particularly strong sales in both the UK and the US. The fashion brand also stated that it had already seen a strong start to September, and yearly group revenue was estimated to be up around 30%. Therefore, it seems evident that profits remain extremely strong. There is equally no indication of profits slowing down any time soon.
What would I do now?
After its 20% fall, it therefore offers an opportunity to buy a fast-growing company at a cheaper price than before. Even so, the Boohoo share price is still not cheap. In fact, it currently has a price-to-earnings ratio of around 40, meaning that further growth is already pencilled in to the share price. Further allegations of poor working conditions, or a failure to act accordingly, could therefore damage profits in the near future. I’d buy Boohoo shares, but only as part of a diversified portfolio.
The post The Boohoo share price just fell 20%. Is it the perfect time to buy? appeared first on The Motley Fool UK.
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. 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.
Motley Fool UK 2020