Boohoo’s [BOO.L] share price has been under fire recently. The stock has dropped 7.9% since the start of February (through 5 March’s close). Friday 5 March saw a steep sell off in the stock, with its share price dropping 4.5% on that day alone.
A leaked report that US authorities are looking into allegations of forced labour in its supply chain has not helped Boohoo’s share price, especially since the news could result in goods being impounded. With ESG considerations becoming increasingly important in investment decision-making, how the direct-to-consumer (DTC) fashion retailer responds to the negative coverage could impact Boohoo’s share price significantly.
How would a US ban hit Boohoo?
Boohoo is being investigated by the Customs and Border Protection (CBP) body in the US. This came after human rights charity Liberty Shared passed on a petition detailing problems in the clothing retailer’s Leicester factories. If the CBP finds that merchandise was made using forced labour, it can block imports into the US.
The CBP's investigation follows on from last year’s Boohoo-commissioned independent investigation led by Alison Levitt QC. The Levitt enquiry found that claims of poor working conditions at the Leicester factory were “substantially true”, that Boohoo knew of the failings and that its monitoring of the factories was “inadequate”. Boohoo has adopted the recommendations of the Levitt review.
“The group is confident in the actions it is taking to ensure that all of its products meet the CBP criteria on preventing the product of forced labour entering the US (or any of its markets). Boohoo continues to fulfil orders to customers in the US across all of its brands. The group will work with any competent authority to provide assurance that products from its supply chain meet the required standard,” Boohoo said in a statement to the markets.
“The group is confident in the actions it is taking to ensure that all of its products meet the CBP criteria on preventing the product of forced labour entering the US (or any of its markets)” - statement from Boohoo
Not being able to import goods into the US would hit Boohoo’s revenue streams at a time when it is increasing its footprint in North America. The US is Boohoo's second-biggest market, generating £167.7m in the four months up to 31 December — a 52% increase compared to the same period last year. It would also place further pressure on Boohoo’s share price.
This is no idle threat. The CBP has a track record of taking a tough line on slave-produced goods. Recently, it banned some imports from China’s Xinjiang region over allegations that they were made using forced labour from detained Uighur Muslims.
What’s the impact on Boohoo’s share price?
The negative coverage can be seen in Boohoo's share price, which has dropped 7.9% so far this year (through 5 March’s close). This is in stark contrast to the bumper earnings the retailer has reported during the pandemic, indicating that investors are taking the issue seriously. In its trading update, Boohoo reported total group revenue of £660.8m in the last four months of 2020, up 40% from the previous year.
Boohoo's reported total group revenue - a 40% rise
Boohoo was able to increase its forecasted revenue growth for the financial year ending 28 February 2021 to between 36% and 38%, ahead of its previous guidance of 28% to 32%.
How has DTC retail been faring?
Rival ASOS [ASC] has also seen increased sales during the pandemic. Driving this growth are closed high streets and the wider shift to DTC online shopping brought on by the pandemic. In a presentation accompanying Boohoo’s takeover of Debenhams, the retailer cited data from Statista showing that the UK online fashion market grew 26% in 2020, while up to 55% of fashion products are now bought online, versus 33% previously.
Yet, while Boohoo’s share price has struggled, ASOS’s has soared. So far this year, ASOS’s share price is up 8.21%, a marked contrast to last year when it looked like Boohoo was stealing its market share thanks to the canny use of social media influencers and international expansion.
In a trading statement for the four months to 31 December, ASOS reported that total group sales were up 23% to £1.33bn, while it had increased its active customer base by 1.1 million, to total 24.5 million.
Asos' reported total group sales - a 23% rise
Strengthening ASOS's line up is the acquisition of Topshop, Topman, Miss Selfridge and HIIT following the implosion of Phillip Green's Arcadia group.
The continuing fallout from the Leicester factory scandal will certainly give investors who place value on ESG considerations pause for thought before investing in Boohoo.
Investors may be able to forgive and forget in the long-term — especially if the retailer is able to demonstrate it has put in place the necessary measures to avert another scandal. However, the threat to Boohoo’s US revenue is a serious consideration and investors might want to see how it plays out before investing.