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'Many failings' found in Boohoo supply chain ahead of interim results

The fast fashion retailer publishes its half-year results on 30 September
'Many failings' found in Boohoo supply chain ahead of interim results

Boohoo (BOO) chief executive John Lyttle has described supply chain shortcomings identified in an external review as “unacceptable”, days before the fast fashion retailer is due to release its half-year results. 

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Boohoo has published a report conducted by Alison Levitt QC into its supply chain, which was launched in response to allegations in The Sunday Times regarding poor working conditions and the underpayment of workers in factories manufacturing garments for the retailer. 

The allegations stopped a soaring share price run for the fast fashion retailer, which has benefitted from the closure of clothing stores and a boom in e-commerce following the outbreak of the coronavirus. Boohoo shares more than doubled in value between March and June before slumping after the allegations were made. They have since staged a recovery and rose by 15 per cent after the supply chain review was published.

Boohoo capitalised on lockdown

The report has concluded that the allegations were true and that Boohoo’s directors were aware last year of “very serious issues about the treatment of factory workers in Leicester”. Boohoo’s monitoring of its supply chain is said to have been inadequate, and while directors did act in response to concerns, the company did not react quickly enough. 

Furthermore, Ms Levitt believes that “Boohoo ought to have appreciated the serious risks created by ‘lockdown’ in relation to potential exploitation of the workforce of the Leicester factories,” adding that the retailer “capitalised on the commercial opportunities offered by lockdown”. 

Boohoo and its directors, however, have not committed any criminal offences, in her view, while the report acknowledged that the retailer believed it was supporting Leicester factories by not cancelling orders. Unfortunately, the company “took no responsibility for the consequences for those who made the clothes they sold”, according to the findings.

Boohoo has pledged to boost standards, including measures to reduce its number of suppliers and publish its list of tier one and two suppliers annually, in line with the report’s recommendations. It will continue to source garments from Leicester, an area which in recent years has attracted attention over alleged sweatshop activity. “It is clear that we need to go further and faster to improve our governance, oversight and compliance,” Boohoo’s chief executive said.

Interims out next week

Boohoo publishes its half-year results on Wednesday 30 September, in which it will reveal whether its controversies have hampered sales. The company has not published a trading update since the completion of its first quarter. In its three months to 31 May, Boohoo posted revenues of £368m, representing a near 50 per cent increase on the prior year’s first quarter. And it recorded a gross margin of 55.6 per cent, a rise of 60 basis points on the previous year.

There is no evidence that sales have relented after the supply chain allegations were made. The pandemic has facilitated a widespread adoption of online shopping, while ‘Buy Now, Pay Later’ (BNPL) providers such as Klarna have encouraged e-commerce. Boohoo and rival ASOS (ASO) both feature Klarna on their websites. 

The controversy’s impact on Boohoo’s share price is illustrative of retailers’ vulnerability to scandals. Ted Baker (TED) shares plunged in 2018 after allegations of workplace misconduct against its then-chief executive Ray Kelvin. Retailers are exposed to boycotts and can struggle to retain customers in the early aftermath of accusations of impropriety, whether they are eventually found to be true or not. 

The increased use of BNPL may pose another challenge for Boohoo. A study on BNPL by credit broker money.co.uk ranked Boohoo second in its list of fast fashion retailers in terms of the prominence of BNPL on its website. There are concerns over young shoppers’ exposure to the schemes, and 18 to 24 year olds owe BNPL £225.44 on average, which is 28 per cent more than the average UK consumer, who owes £176, according to money.co.uk. 

The Financial Conduct Authority is examining BNPL as part of a broader study on new areas of unsecured credit. The watchdog will make recommendations to its board early next year.