Fast fashion retailer Boohoo [LSE:BOO] had not yet recovered from a highly damaging modern slavery scandal when it was hit by supply chain problems and rising costs.
Combine that with increasing awareness from both customers and investors regarding the damage fast fashion can cause on the environment, and the UK-listed company has an uphill battle ahead to get everything back on track.
Back in 2020, a Sunday Times investigation discovered that Boohoo had been underpaying its workers in its supplier factories in Leicester. Following the revelation, the group set up an independent inquiry and pledged to address the problems with a new programme. In 2021, it cut its ties with hundreds of suppliers.
Despite its efforts to fix the problems in its supply chain, last June a report by Labour Behind the Label, ShareAction and the Business & Human Rights Resource Centre said they found little evidence that Boohoo had actually changed its commercial purchasing practices.
Environmental concerns at Boohoo
Meanwhile, on the environmental side, Boohoo does not have a very good track record. A report by Changing Markets Foundation published last July found some of the biggest fashion brands guilty of greenwashing, while using materials that were harmful for the environment.
It discovered that Boohoo was the worst offender for extensive use of synthetics, with 85% of its products used fossil fuel-based fibres. Although the business announced some plans to launch collections with recycled synthetics, the authors of the report noted that simply switching would “do nothing to reduce the brand’s overreliance on fossil fuel-derived fibres, let alone tackling pernicious issues like microfibre release, and the culture of disposable ultra-fast fashion that the brand epitomises and promotes will continue – with added greenwashing”.
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Such practices are enough to drive environmentally-conscious customers and investors away from the brand to look elsewhere for more sustainable options.
Meanwhile, on February 16 a Boohoo advert promoting an oversized T-shirt was banned by the Advertising Standards Authority for objectifying and sexualising women.
It is not just the ethically-minded investors who may have some problems with Boohoo. Although the group saw a bump in demand from lockdowns as consumers turned to online shopping, the pandemic has continued to present issues affecting the bottom line.
In the group’s latest trading update, for the three months to 30 November, the directors warned of continued disruption to its international delivery proposition, as well as pandemic-related cost inflation.
As a result, Boohoo lowered its guidance for full year sales growth to between 12% and 14% from 20% to 25%. In addition, the board now expects adjusted earnings before interest, tax, depreciation and amortisation to by 6% to 7%, compared with its previous guidance of 9% to 9.5%, due to significantly higher return rates impacting net sales growth and costs.
It worth pointing out that the management sees its problems as transient in nature.
Fund managers cooling on the stock
Although the retailer continues to work on its recovery and addresses key issues, some have been cooling on the stock. In January, one of the largest shareholders in Boohoo, Jupiter Fund Management, more than halved its stake in the company. Meanwhile, the managers of the Premier Miton UK Growth Fund completely sold their holding in the company, according to an update published in December.
“We sold our holding in online clothing company Boohoo, as its supply chain disruptions are proving more severe than initially expected and there are question marks over the future growth of its major brands. Subsequent to exiting the position, the company announced a profit warning,” they noted.
The managers of Baillie Gifford’s British Smaller Companies fund are more optimistic and are continuing to hold on to the stock – at least according to the latest update they issued in December.
They said that the considerable turnaround at Boohoo in 2021 has been pleasing and “underlines the merits of a patient and engaged approach”. “We now hope to see that reflected in an increased share price following significant weakness over the past 18 months,” they added.