Shop talk: Why did the market react so badly to Boohoo’s recent trading update compared with Sainbury’s?

22nd January 2015

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Earlier this month, two very different retailers issued very contrasting trading statements and saw their share prices react in very divergent ways writes Nick Kirrage.

Nothing too surprising there you might think – except for the fact that Boohoo.com, the business that saw its share price consequently dive, had published the sort of numbers for which the other, Sainsbury’s, would happily chew off its metaphorical arm.

On 7 January, the date of both announcements, Boohoo’s share price fell some 40% as the online fashion retailer admitted recent growth had been a little down on the 35% it had been stating for the full year. That would still, of course, be amazing growth and a level about which those at the helm of Sainsbury’s, or indeed any of its competitors, can only dream of.

As the supermarket giant itself put it: “The outlook for the remainder of the financial year is set to remain challenging, with food price deflation likely to continue.” So why did its shares stay pretty much flat on the day while those of Boohoo plummeted? Well, would you like to guess which business began the morning trading on a price/earnings (P/E) ratio of 40x and which was on a P/E ratio of 8x?

When all is said and done in investing, it is not enough to predict the direction a business is heading or to judge whether any associated newsflow will be good or bad or even to call the expectations of investors correctly. It all comes down to paying the right price – and, equally, not paying the wrong one. Here on The Value Perspective, we were – and remain – invested in just one of these businesses.

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