Boohoo share price is having its worst week ever. The shares of the fast-fashion group are down by almost 20% today, a day after it dropped by more than a third. The stock is now down by more than 50% in the past three days. So, is Boohoo stock price now a buy?
Why Boohoo share price is tanking
Boohoo has made negative headlines since Sunday when The Sunday Times published a scathing article about its processes. The paper said that workers of its Nasty Gal brand were underpaid and were working in unfavourable conditions. The workers, at a company called Jaswal Fashions, are paid as little as £3.50 per hour.
In a statement, Boohoo management said that Jaswal was not a declared supplier for the firm. It said that another company was using the premises that were formerly used by Jaswal.
These revelations came at a few weeks after the company said that it was awarding bonuses worth more than £150 million to its founders and other executives. It was also accused of using factories that were fuelling the spread of coronavirus. According to the Financial Times, Boohoo’s shareholders are now pressuring the company to explain the actions it is taking to change. Aberdeen Standard Investments said:
“We are speaking to Boohoo management in light of these recent allegations to understand what action they are taking in response.”
In a statement, Boohoo said that it was setting up an independent committee to investigate these investigations.
Are Bohoo shares a buy now?
The current plunge of Boohoo share price has ended a rather successful run for the company. For one, the stock declined to a yearly low of 131p in March but had jumped by more than 200% before these allegations. This plunge now means that the company is valued at more than £2.87 billion.
While the current news are bad, we believe that they are not all that bad. For example, it is widely known that most fast fashion brands outsource their production to low-cost countries. That aspect will not change in the near term because the employees of the subcontractors need that money. Also, we know that other companies like Adidas and Nike have been accused of using low-cost labours for decades.
Also, we know that customers will not stop buying affordable clothes because a company uses low-wage workers. Therefore, we believe that the company will continue doing well even with the current streak of bad news. In 2019, Boohoo had more than £1.23 billion in revenue, which was higher than £856 million generated a year before. This growth will accelerate as more people continue buying online.
Finally, we are aware that Boohoo is not the only firm to go through a PR nightmare. Other fashion groups, including Nike and Inditex have all gone through these issues.
Boohoo share price analysis
The daily chart of Boohoo share price looks ugly as you can see below. The shares are trading below the 50-day and 100-day moving averages. They are also at the lowest level since April 8. Also, the price tested the 78.6% Fibonacci retracement level and formed a three black crows pattern.
Therefore, I expect that the stock will be under pressure in the near term. This could see it drop to below 200p. However, in the longer term, I expect the shares to continue rising as bulls attempt to test the YTD high of 433p.
Please note: This is not trading advice. Do your research before you invest/trade.