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Home » Popular Markets » Equities » Boohoo: supply chain issues and competition are biggest challenges ahead

Boohoo (LSE:BOO) posted strong top-line results today, with interim revenues growing 73% year-on-year. Given Boohoo’s successful customer acquisition over the last 18 months, its revenues look set to continue to grow in the short term, buoyed by these customers buying more expensive products.

However, investors will be playing close attention to the sustainability of growth in the UK as Boohoo noted Q2 results were impacted by higher returns and the reopening of physical retail.

The Boohoo share price was off more than 10% in the market this morning, but the stock has been losing ground for weeks now. Shares are down 18.52% over a 30 day period.

“Our experts say supply chain concerns are now acute for companies like Boohoo,” said Harry Barnick, senior analyst at Third Bridge. “Autumn/winter clothing is typically sourced from outside of Europe and if Boohoo is unable to mitigate its supply chain issues, its successful test and repeat sales model could begin to unravel.”

Investors will be paying close attention to gross margin levels. Boohoo will either have to absorb additional supply chain costs or pass these on via price hikes.

This week Boohoo published its supplier list in another attempt to clean up its supply chain and image.

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“Although this transparency is welcome, many will see it as just the beginning of a much bigger sustainability journey,” observed Barnick. “As the poster child of fast fashion, Boohoo is going to be at the centre of several ethical trading dilemmas, none of which it can solve alone.”

Competition could be another issue for Boohoo

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Although Boohoo’s market share has doubled over the last two years, as we head into the all-important Christmas season, the UK market is hotting up, with Chinese competitor, Shein, presenting a real threat to Boohoo’s market share given its price point and broad offering.

First half sales at Boohoo rose 20% to £975.9m compared to last year, driven by the UK and USA. Growth was much slower in the second quarter as UK return rates returned to pre-pandemic levels, physical stores reopened and COVID-19 related disruption impacted international markets.

Underlying cash profits (EBITDA) of £85.1m fell 5% on last year. This reflects higher marketing, warehouse and shipping costs.

Cost headwinds are expected to continue

Cost headwinds are expected to continue in the second half, including freight and wage inflation. Full year underlying EBITDA margins are expected to be 9% – 9.5%, down from guidance of 9.5%-10%. Full year sales growth is expected to be 20% – 25%. These are both lower than the medium-term target for annual sales growth of 25% and underlying EBITDA margins of 10%.

“This is not Boohoo’s best look,” said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown. “Sales momentum has sorely disappointed the market, with a lack of demand relating to holidays and festivals hurting the important UK market. The fast-fashion giant is also being held back by enormous extra costs in its supply chains. Higher wages for its workers, plus the well-publicised freight and shipping disruption are all affecting profitability. These headwinds aren’t going to disappear overnight, so it’s crucial that sales get moving at a better pace.”

Boohoo is spending heavily on increasing capacity, but if sales don’t grow to match it will have serious implications for profits. The downgrade to full year margin expectations is not what investors wanted to hear.

This challenging backdrop comes as the Agenda for Change rumbles on in the background. Supplier and factory audits are being rolled out in response to allegations of poor working conditions. The steps to make amends are to be commended, and it’s important they’re effective because Boohoo can ill afford another scandal.


This article is not investment advice. Investors should do their own research or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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