I was dying to write that headline and following a lengthy article in the Financial Times at the weekend on working conditions in small clothing factories in Leicester, I realised it was just a matter of time for Boohoo Group (LSE:BOO). Once the darling of investors who loved its ability to tap into the demand for cheap and desirable clothing (revenues were up 44% last year), Boohoo now seems to be coming unstuck.
Shares in Boohoo Group are plunging today and represent a short term shorting opportunity for CFD traders that can find a broker to quote them a CFD price on this FTSE 250 component. Watching the screens we have seen a long drop from GBX390 to GBX250 with, at the time of writing, some buying activity starting to occur as investors who still want Boohoo stock trying to come in at a lower level.
The big question is going to be whether Boohoo has further to go.
Leicester garment factories in focus
The focus on Leicester garment manufacturers, working conditions and labourers working for less than minimum wages has been one that has haunted the discount clothing sector for some time, but this has historically been about the use of factories in developing markets in Bangladesh and Southeast Asia. The recent return to a virus lockdown in Leicester has been attributed in some quarters to the ongoing illegal use of small garment factories in the city post-March of this year, but this has also brought media focus onto the sector.
Boohoo had been claiming that it sourced 40% of its clothing from factories in the UK, which plays well in the orchestra of UK onshoring we have been listening to recently. But Boohoo is now under attack from campaign group Labour Behind the Label.
“Prior to the COVID-19 crisis, reports of bad practice, underpayment of workers and allegations of non-payment of holiday pay were routine,” Labour Behind the Label said in a report this week. “Industry sources state that it is impossible to produce the units/garments requested by Boohoo for the product price and pay workers the national minimum wage. Indeed, wages of £2-£3 per hour have been reported as commonplace in Leicester factories supplying Boohoo and other e-tailers.”
Boohoo is arguing that it had a 20-person team operating in Leicester who were inspecting garment factories to ensure working conditions were up to standard. Boohoo has also said it will not hesitate to terminate relationships with suppliers that fail to act in both the letter and spirit of its code of conduct.
Can Boohoo Group pull out of this swan dive?
We think not, although there will be some investors tempted to buy in as the share price keeps getting cheaper and heads towards the 52 week low. We are now living in an age where many institutional fund managers and pension fund managers operate under strict internal ESG (environmental, social, governance) rules that control what they invest in, and Boohoo certainly brings up warning lights on the social panel.
Professional portfolio managers who own Boohoo shares will be taking a very dim view of the news flow and will, we believe, sell the stock. Many of them will not have sold it yet but will not want it in their portfolios for much longer – there is simply too much reputational risk for fund managers here. The whole affair has a 19th century, Dickensian flavour to it which big funds will not want to be associated with.
Boohoo will no doubt be scrambling to review its supplier relationships, as will many of its competitors who also source much of their stock from Leicester and surrounding areas. This is going to become a larger crisis for discount clothing retailers as they emerge from lockdown, since the profits they have been booking depend on the margins they can achieve using these factories in the Midlands. Holders of shares in other discount retailers had better brace themselves. It’s another blow for the UK high street at a time when it could least afford it.
