An investigation by a Boohoo-appointed lawyer may show that the company should pay higher prices for garments, which would reduce profits
An investigation by a Boohoo-appointed lawyer may show that the company should pay higher prices for garments, which would reduce profits © AFP via Getty Images

Boohoo is finding out what happens when the fire bucket contains petrol not sand. The UK fast-fashion chain responded to allegations of sweatshop practices at Leicester-based suppliers on Wednesday. It announced it had sacked two UK suppliers and will spend an initial £10m “to eradicate supply chain malpractice”.

Investors took a further step back. Shares that have already lost a third this week fell another 20 per cent. Boohoo found no evidence suppliers were paying workers a measly £3.50 an hour. But “cheap” and “cheerful” are no longer synonymous when shoppers think about Boohoo.

The strong margins achieved by the business now look like a weakness rather than a strength. An investigation by a top lawyer — appointed by Boohoo and billed as “independent” — may show that the company should pay higher prices for garments, which would reduce profits.

Asos and Zalando, rivals of Boohoo that are also resellers, have both pulled its brands from their sites. Their sales are roughly twice and three times those achieved by Boohoo. But their operating margins are far lower — 2.2 per cent and 1.3 per cent compared with 7.4 per cent at the newcomer. The sometime stock market darling maintains it is more profitable because it does not sell third-party products.

What would a less profitable Boohoo be worth? About £2.1bn, assuming expected revenues of £1.6bn this year at operating margin of 3 per cent. That also assumes the same 45 times price to earnings multiple shares have historically traded at. A permanent derating of shares to the current 30 times price earnings multiple pulls the valuation closer to £1.5bn. Both are well below the current market value of £2.9bn. 

Brash Boohoo, a brand favoured by the UK’s Instagram kids, is suffering a particular fall from grace. But the fast-fashion business has had a long-running problem with bad labour practices in some factories. Boohoo’s investigating lawyer should answer this question: does the industry have complex supply chains partly to distance brands from exploitation that keeps their prices low?

The Lex team is interested in hearing more from readers. Please tell us what you think of Boohoo in the comments section below.

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