Boohoo (LON: BOO) (OTCPK: BHOOY) shares rose 12% in London this morning as the company reported a £91 million loss. That's not normally the way we think about things but that's because the normal thinking isn't quite right. There's this thing called the efficient markets hypothesis, EMH. Which says that the things that we already know are already in market prices. Sure, there are variants of this idea but the basic point is widely agreed. So, we all thought that Boohoo was likely to have a shocker - it did. But that the results were going to be bad was already in the Boohoo share price. That things weren't as bad as some expected is what drove the share price up after the revelation.
This is an important thing to know about markets. Expectations matter - what the average expectation of what results will be is what determines that price before the results arrive. Doing worse than expectations will drive the price down, better up. It's not profit or loss which moves prices in the short term, it's whether expectations are beaten - or lived down to of course.
Boohoo share price from London Stock Exchange
The bad results were forecast by that fall in the share price leading up to their issue. As to the results themselves, they're here. Revenue is down, gross profit is down and the very marginal profit turns into that £91 million loss. Yet the forecast for the near future is that matters will improve. Effectively, they've been shocked into increasing efficiency, reducing stock and working capital levels and so on.
It's worth pointing out that Boohoo is one of the top five shorted stocks on the London market with 5% of total issuance out on loan. That shows that there's a substantial number of people who don't think this is a turnaround point.
One paper chooses to lead with it being the cost of returns that's causing the problems.
Another emphasises the forecast improvement in results. A third concentrates on adjusted earnings which, for a company of Boohoo's age, we think isn't quite the point.
Our own view is that despite all that talk about sustainable fashion this online retailing of cheap clothing is here to stay. We simply do not see the young giving up on this habit. But that's not to say that any particular retailer is going to do well in this field. The competition is intense and getting worse what with people like Shein irrupting into the market. Really, this has gone from an innovative sector into one where efficiency is what matters more than anything else. So, the winners in the end will be those who concentrate upon operational efficiency.
